China Counters The Negative Effects Of Covid Zero Policy?

China Counters The Negative Effects Of Covid Zero Policy?

The EUR/USD major currency pair's exchange rate is trying to return above the 1.0000 parity level for the second time in recent times. The first time the rise may have been a consequence of weaker US data, and now the market may have seen improved sentiment following China's actions.

As reported by Bloomberg, risk sentiment may have improved in global financial markets after China announced that it will pump another 1 trillion yuan ($146 billion) into the economy to support GDP growth. China can thus counter both the negative effects of its zero COVID policy and counter the global economic slowdown. China, in effect, can save domestic demand. Nevertheless, today and tomorrow it seems that much more important news than that from China may hit the market.

Today at 1:30 p.m., the minutes of the last meeting of the European Central Bank will be published, from which investors will be able to try to decipher what course the ECB will take this fall. According to the interest rate market, the central bank's borrowing cost could rise by 1 percentage point by October, which could mean two increases of 50 basis points each. It seems that the ECB's priority may be to fight inflation, even if this would be at the expense of economic growth - something that may be evident in today's minutes. This approach may also be borne out by recent statements by the ECB's Isabel Schnabel, pointing to the high risk of inflation and the lack of a decline since the central bank's last decision. In theory, the bigger and faster interest rate hikes in Europe, the more favorable it could be for the EUR (if there was no energy crisis).

On the other hand, tomorrow at 16:00 Jerome Powell will open the symposium in Jackson Hole. The market seems to be discounting a more hawkish stance from the Federal Reserve chairman at this point. The rationale for this is probably the growing realization that central banks are ready to act to bring down core inflation as quickly as possible, even at the expense of macroeconomic weakness. According to the interest rate market, the scales for the next increase in the cost of borrowing may tip toward 75 basis points (60 percent probability for such a move on September 21).

All of this could affect the EUR/USD main currency pair both today and tomorrow, and the struggle to break away from parity levels may only be beginning.


Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)

Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.

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Source: ECB minutes and Jackson Hole key for EUR/USD

China Counters The Negative Effects Of Covid Zero Policy?

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