Morgan Stanley CEO James Gorman has spoken out regarding the US monetary policy. This surprised many, as it is very rare for Wall Street giants to make such statements.
Meanwhile, Germany published mixed statistics yesterday. GDP fell more than what economists expected, while the business sector continued to show promising growth rates.
In an interview, James Gorman said he expects the Federal Reserve to cut bond purchases by the end of this year and begin raising interest rates in early 2022. This is much faster than what Wall Street economists projected, and may cause quite a lot of noise in the market if actualized.
"I personally believe that rates are likely to rise early next year, rather than in 2023, which the Federal Reserve is currently forecasting," Gorman said. "But of course, the Fed will be guided by what their numbers tell them. I'm merely giving you my opinion, "he added.
The main question now is whether the current price pressures are temporary, or signifies more fundamental changes in the economy. But the Fed is firm that it is the first scenario, and is trying to convince the markets of this. Also, no one doubts that the US economy will show strong recovery in the coming months, thanks to the growing consumer spending. However, it is quite difficult to predict how such will affect inflation.
Meanwhile in Europe, Germany published contradicting reports yesterday. Destasis said GDP fell by 1.8% this 1st quarter, which means that in just a year, the economy shrunk by 3.4%. Analysts initially predicted a 1.7% decrease, but production dropped by as much as 5.0% and private consumption declined 5.4%.
Surprisingly, the business sector continued to show promising growth. The IFO said business confidence rose to 99.2 points in May, which is the highest rate since May 2019. The data for the current situation also grew to 95.7 points, while the figure for expectations climbed to 102.9 points.
Both data did not affect the market much, but today, a lot depends on 1.2240, as a break above it will result in a larger jump towards 1.2295 and 1.2350. But if the quote drops below 1.2240, the euro will plunge to 1.2200 and 1.2160.
GBP
Pound declined on the news that EU leaders rejected UK demands to amend the terms of Brexit.
In an interview, European Commission President Ursula von der Leyen said Europe will not give other alternatives to the UK, so it has to comply with the Brexit agreement.
UK complained that the EU is implementing very strict rules when checking the goods moving from the UK to Northern Ireland, so it wanted to make some amendments to the Brexit agreement. But the response of the EU means that nothing will be changed, and that Northern Ireland will remain tied to the single European market.
"The relationship with the UK should remain mutually beneficial and should under no circumstances undermine the integrity of the single market, the Customs Union or the EU's decision-making autonomy," EU leaders said in a joint statement on Monday.
On a different note, the UK Office for National Statistics reported that budget deficit continues to grow due to spending aimed at combating the coronavirus. Hence, this April, net borrowing jumped to £ 31.7 billion, while public debt hit £ 2.17 trillion, which is about 98.5% of the GDP. This is the highest record since March 1962.
But the Bank of England is not yet concerned with such figures, because according to the central bank, it wants the economy to recover first from the coronavirus pandemic. And with vaccination programs underway, the UK should be fully operational by summer, which will offset the massive budget deficit.
With regards to bond purchases, BoE Governor Andrew Bailey said the central bank has no plans to curtail such measures yet, so they will maintain the same volume for quite a long time.
Going back to the pound, a lot depends on 1.4200 today because a break above it will set off a larger jump towards 1.4255 and 1.4310. Meanwhile, a drop below 1.4140 will lead to a further plunge towards 1.4090, and then to 1.4040.