Traders see continued rate hikes over the next year, despite concerns of a recession

The rise in inflation has not slowed down! As a result, central banks around the globe continue to raise interest rates to slow the increase in inflation. Most the established countries target between 2%-3% inflation. However, lately, many of these countries have had soaring inflation data, with some advanced countries reaching YoY highs over 9%! Can central banks slow the rise inflation?

Source: Bloomberg, Stone X

The ECB is the farthest behind in terms of rate hikes to slow inflation. They have hiked rates exactly zero times since the pandemic began. Interest rates currently sit at -0.5%. However, at June’s ECB meeting, Christine Lagarde did pre-commit to hiking rates by 25bps at this week’s meeting. Will it be enough? There is some speculation that the ECB could hike 50bps. However, even if the Committee hikes rates by 50bps, it would still only bring rates to 0.00%. The June CPI reading was a new record high at 8.6% YoY. Markets are expecting rates to be at 2.4% in 1 years’ time.

Everything you need to know about the ECB

The BOJ is sitting with rates at -0.1%. They also meet this week and are expected to keep rates unchanged. However, Japan is one of the few countries dealing with very low inflation, which is the reason monetary policy so accommodative. The May CPI reading for Japan sits at a 7.5 year high of 2.5%! However, within 1 years’ time, markets are expecting rates to increase to 0.6%. Could the BOJ increase rates and still avoid deflationary pressures?

Everything you need to know about the BOJ

The US Federal Reserve raised rates in June by 75bps to 1.75% and is expected to increase rates by another 75bps when it meets again next week. After the most recent CPI reading of 9.1% YoY, markets began pricing in the chance of a 100bps rate hike. However, since then, Fed officials have been on the wires saying that the market may be getting a little ahead of itself. Fed Chairman Powell has said that he is willing to increase rates to get inflation down, despite the chance of forcing the US economy into a recession. Will a second 75bps rate hike be enough to bring inflation down from 4-decade highs? Markets see rates at 3.43% in 1 year.

Everything you need to know about the Federal Reserve

The Bank of England meets next week, however the UK CPI report for June will be released on Wednesday. Expectations for the print are an increase from 9.1% YoY in May to 9.3% YoY in June. The BOE has been increasing rates at steady 25bps increments to bring the current rate to 1.25%. They hoped the small, consistent rate hikes would lower inflation while keeping the UK out of a recession. However, inflation continues to move higher. BOE Governor Bailey said last week that there are a range of things on the table for the August meeting, and he did not want to pre-commit as to what they will do. Will the BOE hike by 50bps next week? Markets currently expect rates to be at 3.02% in 1 year.

Everything you need to know about the Bank of England

The Bank of Canada has been one of the most aggressive in terms of raising rates. Last week, the BOC hiked by 100bps from 1.5% to 2.5%! BOC Governor Macklem said the reason for hiking 100bps is that front-loading tightening cycles tend to be followed by softer landings. On Wednesday, Canada will release June CPI. Expectations are for an increase from 7.7% YoY in May to 8.4% YoY in June! Will the 100bps increase in rates help to lower inflation in July? Or will another large rate hike be needed at the next BOC meeting. Markets are currently pricing in a 1-year rates at 4.44%, nearly 200bps higher than they are currently.

Everything you need to know about the BOC

The RBA and the RBNZ are in similar situations as many of the other large economy countries around the world: High inflation with the possibility of a recession ahead. The RBA currently has rates set at 1.35% and 1-year expectations are for 3.44%. The RBNZ currently has the cash rate at 2.5%, with a 1-year expectation of 3.89%.

Will inflation continue to rise and tip the world economy into a recession? Or will central banks be able to raise rates fast enough to keep higher inflation at bay, while simultaneously keeping the world out of a recession? Central Banks must walk a thin link between inflation and recession right now. Watch the 1-year rate expectations between central banks. The difference between 2 countries expected rates is a powerful tool fx traders can use to determine the next direction of fx rates!

Learn more about forex trading opportunities.

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.