China and U.S. in a further divide – while inflation and recession are raging
Pandemics and health crises, political tensions, war flashpoints popping up, Western sanctions on important European and Asian economies, and grave tensions between nuclear powers—all have had their toll on the financial markets worldwide. The rattling of current affairs and world politics does not seem to seize anytime soon. The international broker OctaFX expert team is convinced it’s time to keep some accompanying phenomena in mind.
Return with a vengeance—inflation
Turkey is drowning in an inflation rate of over 78 per cent. The Australian government agencies expect a 5 per cent inflation rise in 2022. Southeast Asian countries have also experienced an inflation hike. As of this writing, the United States of America officially have an annual inflation rate of 9.1 per cent, a 40-year high from its rates back in 1981–1982.
Such growth is significant since it indicates systemic changes to be established soon, manifesting across the board and worldwide.
There is a down-to-earth aspect to all of this, as well. How is the common individual supposed to react to such global processes? The OctaFX analytics team gives an essential edge for investors and traders in this regard: ‘Within this unprecedented economy, we must rely on and deepen our own skills—especially with risk management and sound psychology. In these financial markets, we need to have confidence in what we can control personally rather than trying to control external factors.’
The two goliaths—correlation between EUR and USD
Both national currencies, the European euro and the U.S. dollar, are world reserve currencies, although the latter is the undisputed frontrunner. Since 1999 the exchange rate showed the euro to be stronger than the U.S. dollar. Now the euro weakened to be almost on par with its American counterpart. The last time the market experienced such a match was in 2002’s fourth quarter, almost 20 years ago.
The U.S. Federal Reserve (Fed) has been much more explicit in its intentions to combat the rising inflation than the European Central Bank (ECB). For instance, the Fed started raising interest rates in March 2022, while the ECB waited for another four months—until July—to follow suit. One main reason for this crucial disparity in monetary policymaking and the ECB’s reluctance to be hawkish is that higher rates may provoke a public debt crisis.
All the while, the European proximity to the war in Ukraine also had its share in the euro’s weak performance.
Political upheaval in Italy, farmers’ strikes, and energy and natural gas price hikes are all symptoms that factor into the euro’s sliding performance against the U.S. dollar, too.
The OctaFX analytics team proceeds to connect the dots between the Italian crisis and the euro: ‘In Italy, we have a potential sovereign debt crisis in development. Rising inflation and the ECB being “forced” to raise rates will further hurt Italy’s debt. Should Rome fail to refinance its debt, the question would be whether the ECB will bail Italy out or simply let it default. Either direction is likely to hurt the European currency further.’
In conclusion, the macroeconomic environment is not looking good. And inflation is not the only reason: the Purchasing Managers’ Index (PMI) is constantly dropping, as well as a significant slowdown of the world economy’s total amount of output produced and supplied in the last quarters is all but confirmed. It doesn’t matter how much the English Wikipedia article’s definition of ‘Recession’ is manipulated—a recession for the U.S. indeed still is.
Although recession fears are also spreading globally, the demand for the safe-haven U.S. dollar remains somewhat durable—the result is that the Foreign Exchange currency pair EURUSD keeps on pushing lower.
New paradigms on the horizon?
In the past weeks, news arose of Middle Eastern energy giant Iran soon applying for the BRICS membership. BRICS is a close assembly of the five major emerging economies of the world—Brazil, Russia, India, China, and South Africa. A few days ago, even Algeria, which is also rich in natural resources like oil and gas, officially announced its plans to join the alternative supranational association.
BRICS is all the more interesting because—amidst the world economic trembles felt by most countries—this year, its members announced a new innovative basket reserve currency for their global ecosystem of the economic corporation. The currency basket’s content naturally comprises the Brazilian real (BRL), South African rand (ZAR), Russian ruble (RUB), Chinese renminbi (CNY), and Indian rupee (INR). This idea goes back to their first summit in Yekaterinburg in 2009.
Just by its mere existence, this new global reserve currency will contest the U.S. dollar’s historical supremacy as the world reserve currency so far.
This strive for autonomy is already accompanied by escalating political tensions between Beijing and Washington, DC, as the recent visit of the U.S. House of Representatives speaker, Nancy Pelosi, to Taiwan indicated. Beijing explicitly saw this diplomatic act as an apparent breach of the One-China policy the U.S. officially subscribed to—until lately at least. Significant sanctions from China’s side and further intensification can surely be expected.
All in all, these tectonic movements in the global financial infrastructure and plain politics will also majorly impact the Foreign Exchange market—possibly leading to very exciting paradigm shifts.