Confrontation between the Fed and the ECB

Analyse der Finanz- und Warenmärkte

Market Watch review. 19.03.2021

In today's release, we’ll cover the following topics:

  • The Fed is holding back the growth of the dollar. 
  • The ECB will not be ready to raise rates for a long time. 
  • Risks for the oil market.

On Tuesday, by the end of the US trading session, it became known that the Federal Reserve is still not considering raising interest rates, despite the increase in the growth rate of inflation and US GDP. I will not say that the Fed's decision on rates was big news for traders and investors, but the demand for the US dollar decreased. At the same time, there was no significant strengthening of stock indices, thereby indicating the risk of a correction in the main US stock indices.

A similar opinion was expressed in an interview with Bloomberg TV by Greg Jensen, the investment director of Bridgewater Associates, which manages more than $150 billion. He said: "We are on the verge of a new inflationary wave that could force the Fed to raise rates sooner than expected." This scenario takes into account the overall strengthening of the US dollar in the long term, and also puts the growth of stocks and bonds at risk.

I will also draw attention to the ECB's position, which does not significantly differ from the recent statements of the head of the Federal Reserve. The ECB is extremely cautious about the current economic situation, emphasizing the lack of reasons for complacency. The European regulator also notes that low interest rates and the asset purchase program remain a key tool for saving the economy. Simply put, we are being given to understand that the ECB's monetary policy will remain very soft for a long time to come. Moreover, it may be further softened.
All this, and the fact that Southern Europe may remain in lockdown for the next summer season, significantly increases the likelihood of further deterioration of the economic situation. In turn, this increases the risk of monetary policy easing by the European regulator. Therefore, the risk of a weakening of the euro in the long term remains extremely high. 

And now we turn to the oil market. Despite the fact that there is still no panic, and US oil is trading in an ascending channel, the risk of developing a sufficiently strong corrective decline with the prospect of a trend change remains elevated. Pressure on oil prices is exerted by two fundamental factors: first, the growth of stocks, which we are seeing for the fourth week in a row, and second, the surge in new registered cases of COVID and the suspension of vaccination in Europe. All this increases the likelihood of a decline in fuel demand and, as a result, may provoke a more powerful wave of sales in the coming days.

Closely monitor the news background and be prepared for all the surprises of the market.


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