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Will monetary easing prove stronger or will worsening global economic prospects weigh most heavily for the financial markets?
Financial markets signal that the most important and urgent problems besetting the global economy are reasonably under control, for now, whereas the underlying forces are not being addressed. The result is very sluggish growth. Are the political trends in line with this outlook? And, will the relative lull soon be over?
If the dollars keeps increasing in value, it won’t be long until Trump intervenes. This will lead to more volatility in EUR/USD.
For a long time it looked like the BoE was the only big bank increasing their interest rates. However, Brexit has finally changed their policy.
There is an increasing concern whether an even looser monetary policy will stimulate growth as long as the governments don’t provide more fiscal stimulus. That’s why we expect the ECB to wait for more fiscal stimulus and be content for now by preventing a stronger euro. This will probably mean a rate cut to -0.5% and long-term rates that are not far from their bottom.
The Fed has good reasons to maintain the current policy or ease just slightly. Markets will have to reflect this in the coming period