Cash is King: Investing in Currencies during Recessions

Weekly Recap: Fed Ready to Tighten Policy, ECB adjusts Inflation Target

USD: Fed is ready to tighten if Economy showed further Progress

The Federal Reserve stated that “substantial further progress” was generally seen as not having yet been met, though policymakers expect the economy to continue to progress. The FOMC Meeting Minutes released on Wednesday showed some officials expect the conditions for beginning to reduce the pace of asset purchases to be met earlier than they had anticipated. While other members saw that incoming data is not providing a clear signal about the underlying economic momentum. Fed officials agreed to continue assessing the economy’s progress and maybe begin discussing their plans for adjusting policy and asset purchases in the upcoming meetings. 

The U.S. dollar edged slightly higher on the back of the release as the Fed minutes supported renewed greenback demand. Fed members are growing more comfortable with the idea of reducing asset purchases and an announcement could be made later this year. 

EUR: ECB announces new Inflation Target

Weekly Recap Market News

The European Central Bank performed its first strategy review since 2003, and announced a new monetary policy strategy on July 8th 2021. The ECB adopted inflation target at 2% for medium term, instead of targeting inflation of close to but below 2%. Policymakers have also confirmed that the set of ECB interest rates remains the primary monetary policy instrument. The central bank will include climate change considerations in its monetary policy operations. During its June meeting, the European Central Bank left monetary policy unchanged, expecting net purchases under the PEPP to continue to be conducted over the coming quarter at a significantly higher pace than during the first months of the year. 

AUD: No Rate Hikes until 2024

The Reserve Bank of Australia kept official interest rates on hold at 0.10% on Tuesday. After its July meeting, the bank announced three decisions. First, the bank announced that the bond-buying program will be extended for two months beyond September; but tapered the bond purchase to AUD 4 billion from AUD 5 billion a week. Second, the RBA did not extend its yield-target horizon beyond April 2024. Third, the central bank left the yield target unchanged at 0.1%, signalling that the policy rate will remain unchanged at the current level until early 2024.

The Reserve Bank Governor Philip Lowe underlined that the RBA is still committed to achieving full employment and inflation that is consistent with the 2–3% target range. The labour market in Australia continues its strong recovery and the unemployment rate falls to pre-pandemic levels at 5.1%.  The economy’s spare capacity has been decreasing faster than expected. Philip Lowe pointed out that the labour market is expected to show further strength with wage gains reaching 3% annually before inflation can sustainably remain within the RBA’s target.

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