- US Fed Chair Powell prioritizes fighitng inflation, and ready to see negative growth.
- Eurozone ECB's Lagarde conveys a balanced, wait-and-see approach.
- UK BOE's Bailey signals inflation is already taking its toll.
Football fans will have to wait until the winter to see the World Cup – but forex traders have their dream team playing in a panel already now. The three most influential people in currency markets have all appeared together and they provided a clear ranking of their respective currencies.
I see the fall in EUR/USD – and the larger one in GBP/USD – as fully justified. Here is why.
King dollar: Federal Reserve Chair Jerome Powell said that the No. 1 goal is to bring price stability, and does not even want to think about the deanchoring of inflation expectations. He added that the US economy is strong and could withstand higher interest rates.
Most importantly, he clearly prioritizes crushing inflation. He wants to cool the economy, and only "hopefully" to avoid negative growth. Between the Fed's two mandates of price stability and full employment, Powell clearly focuses on the former. Putting a lid no inflation means higher rates, and hat is positive for the dollar.
Mixed euro: European Central Bank Governor Christine Lagarde has maintained a balanced approach, perhaps in line with her role as the host of the panel in Sintra, Portugal. Her words also come after Spain's inflation hit 10% but Germany's retreated to 7.6%, lower than expected.
Her message of acting according to data means uncertainty, which helps the euro against the pound, but fails to beat the dollar.
Depressed pound: Bank of England Governor Andrew Bailey cast a gloomier message, emphasizing the shock caused by the increase in the cost of living, and saying it already has an effect. That means Brits have less money in their pockets, and that higher prices are already working to cool the economy.
While he said the BOE may act "forcefully" against inflation is needed, he seemed reluctant to endorse a hawkish point of view.
Did central bankers say something absolutely new? No. Nevertheless, having the three of them in one stage, talking calmly about their struggles and about policy, is impactful. The image of all them together is likely to remain in traders' minds for longer, extending the advantage of the dollar, the lagging of the euro and the weakness of the pound.
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