US and European stock futures are trading cautiously higher as traders are eager to learn what central banks have to say about their monetary policies this week. Several central banks will not only be reporting their monetary policy decision this week but will also be setting the trading tone among investors and traders for the rest of the month. So far, there is no doubt that traders have had largely mixed emotions.
This is because, on the one hand, they know that central banks cannot be overly aggressive with their approach to lifting interest rates even though the inflation readings are still stubbornly high. Secondly, investors are also concerned about the slowdown in global economic activity, mainly due to the hawkish monetary policy stance among central banks. The two banks which will very one will be paying close attention to in terms of their monetary policy decision are the Bank of England and the Fed.
When it comes to the Bank of England, it is pretty much a deal that the central bank will not hesitate to lift the rates even further, and it is highly likely that the bank will increase the interest rate by 50 basis points.
Remember, the bank has raised interest rates several times since last year, and this hasn’t produced any positive results for the Sterling, which is currently falling off a cliff against the dollar and other currencies. So even though the Bank of England may increase the interest rate by 50 basis points, the path of the least resistance for the Sterling will likely remain to the downside. The GBP/USD has already touched the lowest level in 37 years, and looking at the price action; it seems highly plausible that we may see the Sterling falling to 1.10 against the dollar.
The Fed will announce its monetary policy decision on Wednesday, and it is also pretty much given that the Fed will increase the interest rate by 75 basis points. The Fed has no choice but to continue to increase the rate for the time being, and they are aware that it is coming at an economical cost. This is because higher interest rates are constantly slowing economic activity in the US.
Geopolitics
Another factor likely to bring economic growth to a stand is the ongoing geopolitical tensions between the US and China. President Biden has made the US position very clear by saying that it will use American forces to defend Taiwan should the island want to declare independence. Given the island’s support from the US now, it is highly likely that the lawmakers will declare independence.
All of this is not sitting right with China which has warned the US several times not to stick its nose in China’s territory or its affairs. Traders are worried about this increase in tension. In addition, there have been some reports that the US is also interfering with relations between Turkey and Armenia which President Erdogan isn’t happy about. The ever-growing geopolitical tensions should be considered a warning sign as, generally speaking, these conflicts usually turn into massive problems and sometimes leave no option but a military conflict.