The adjustment and influence of European and American monetary policy

1. The Fed raised interest rates by around 300 basis points this year.

The Fed is expected to raise interest rates by around 300 basis points this year to give the US enough monetary policy room before a recession hits. If inflation pressure continues within the year, it is expected that the Federal Reserve will actively sell MBS and raise interest rates in response to the threat of inflation. The market should be highly alert to the liquidity impact on the financial market caused by the acceleration of the Fed’s interest rate hike and balance sheet reduction.

2. The ECB could raise interest rates by 100 basis points this year.

The high inflation in the eurozone is largely influenced by the soaring energy and food prices. Although the ECB has adjusted its monetary policy stance, the monetary policy has limited restraint on energy and food prices and the medium and long term economic growth in the Eurozone is weakened. The INTENSITY of interest rate hike by the ECB will be far less than that of the US. We expect the ECB to raise rates in July and likely end negative rates by the end of September. We expect 3 to 4 rate hikes this year.

3. The impact of monetary policy tightening in Europe and the US on global money markets.

Strong non-farm data and new highs in inflation kept the Fed hawkish despite rising expectations of a us economy turning into recession. Therefore, the DOLLAR index is expected to further test the 105 position in the third quarter, or break through 105 by the end of the year. Instead, the euro will end the year back around 1.05. Despite the gradual appreciation of the euro in May due to the shift of the MONETARY policy stance of the European Central Bank, the increasingly severe stagflation risk in the medium and long term in the Euro zone is aggravating the imbalance of fiscal revenue and expenditure, strengthening debt risk expectations, and the deterioration of the terms of trade in the euro zone due to the Russia-Ukraine conflict will weaken the sustained strength of the euro. In the context of global triple changes, the risk of depreciation of Australian dollar, New Zealand dollar and Canadian dollar is high, followed by euro and pound. The probability of strengthening trend of US dollar and Japanese yen at the end of the year is still rising, and it is expected that emerging market currencies will weaken in the next 6-9 months as Europe and The United States accelerate the tightening of monetary policy.