Hike rates

Central banks are starting to hike rates – which currency will benefit the most?

The FED was the first major central bank to start becoming hawkish in the second quarter of last year. However, we noticed already in the summer, that they were going to start tightening monetary policy, as they began to adjust their rhetoric, sounding less dovish. Inflation was the main reason for this decision, with the CPI (consumer price index) rising above 5% in the United States at the time, and it continues to rise today.

Inflation has picked up all over the world, accelerating in particular in the second quarter of last year, so other major central banks have also started to get hawkish. The Bank of England has already carried out two rate hikes, raising them from 0.10% to 0.50%, while the European Central Bank (ECB) is also planning to tighten its policy. The latest comments came from Villeroy, a member of the ECB’s Governing Council, of the Banque de France.

Villeroy Bank of France

  • We will do what it takes for inflation
  • I guarantee you that we will do what is necessary to bring inflation back to around 2% over time.
  • The inflation bump should be temporary
  • French inflation should gradually decline within a month

So he also suggests action, and the market likes the idea of ​​a hawkish ECB. We saw that after the ECB press conference last week, the Euro turned bullish, with EUR/USD rising from 1.11 to near 1.15. But the United States is ahead in terms of inflation and monetary policy tightening. So, is that all for EUR/USD buyers?

After all, which currency will benefit more from the tightening – the euro or the USD? Villeroy said the market reaction to the ECB may have been too strong, and it appeared to be. The FED is expected to be much more hawkish, and there’s a good chance it will come up with a 0.20% or 0.50% rate hike in March, as Daly commented overnight. So in my view, the USD will again have the upper hand against the EUR in 2022, since the FED is ahead of the ECB in tightening, so we have a bearish bias on EUR/USD.

EUR/USD

San Francisco Federal Reserve Branch Chairman Mary Daly speaking in an interview on CNN

  • Daly in favor of a rate hike in March
  • Inflation could get worse before it gets better
  • Says inflation ‘will definitely get better’
  • Favors an interest rate hike in March
  • Fed can’t be too aggressive on rate hikes
  • Don’t expect 2% inflation by the end of the year