Geopolitical tensions and central bank moves: the impact on financial markets

Last month put the stability of the financial markets, hitting investors cith a series of events of global significance. Macroeconomic data, geopolitical tensions and monetary policy decisions have contributed to delineating a landscape of uncertainty and significant fluctuations.

He writes it Roberto Gusmerini, Head of Dealing Ebury Italia in a long analysis in which he explains that “the conflict in the Middle East, asuddenly worsened, it catalyzed the attention of the markets. Growing geopolitical unrest has pushed investors towards safe haven goods, leading to a peak in the price of Brent oil, which has crossed the psychological threshold of 90 dollars a barrel – the highest point since the outbreak of hostilities in the Gaza Strip. This wave of instability has threatened to exasperate already tense international relations. However, a total war scenario has been avoided, and this has, for now, investors' nervousness was partially calmed.”

Spotlight on Central Banks

The monetary policy of central banks – explains the expert – “continues to exert its influence predominant on the lively stage currency. The expectations of rate cut interest rates have been tempered, with particular reference to the United States where the perception has grown that rates may remain higher than expected. Inflation indicators in the world's largest economy have led markets to downplay the chances of seeing expansionary measures from the Federal Reserve this year, while rumors of possible hikes have been raised, promptly tempered by governor Powell's statements. Despite this, the US dollar showed a appreciation yessignificant over the course of the year, although the rally has recently stalled, easing some of the gains against major currencies”.

The analysis

As for the recent statements of the Fed “have outlined a more cautious approachoe accommodative, raising the bar for the hypothesis of future rate increases in the USA. Furthermore, a slowdown in economic growth and a job market that is no longer so lively in the United States have brought the possibility of early rate cuts in September back onto the discussion table, while the market is pricing in two cuts by the end of the year.”

In this scenario, “the Australian dollar stood out, reaching a performance peak against the US dollar on expectations that the Reserve Bank of Australia may take a stronger stance to stem inflation. A vigorous labor market and inflationary pressure suggest not only the absence of imminent cuts but the orientation towards a policy of rate increases”.

Europe, encouraging signs

Last but not least, we witness “an encouraging economic recovery in Europe, with economies of the Eurozone and the United Kingdom which seem to have left the most critical phase behind. This dynamism has brought support and strength to the euro and pound, which have recovered ground against the dollar in recent times. As always, it is crucial to continually monitor the financial market landscape as scenarios can evolve rapidly.”

To complete the analysis of the financial and currency markets, “relevant developments emerge regarding some of the fundamental currencies and some less central ones in the conglobal context”.

Japanese yen and Swedish krona protagonists

The chaos that afflicted the markets last month saw it Japanese yen and the Swedish krona as “the least flattering protagonists. The latter, in particular, has suffered the backlash of an economy that is proceeding at a slow pace and of an ultra-cautious attitude adopted by the Riksbank, Sweden's central bank. Indications of a possible rate cut at the next meeting in May had a tangible impact on the position of the krona, even sending it to its lowest level against the euro since last November.

Focus on emerging markets

Moving your gaze to the emerging markets, the Chilean peso showed a significantly more positive performance last month, gaining ground to position itself around the 929 level against the US dollar and returning below 1000 against the euro. Levels not seen since late January. Factors such as the continued high price of copper and a generally positive Chilean macroeconomic context have certainly contributed to this strengthening.

ECB towards the scissors

In terms of monetary policies, we have witnessed an opening of the ECB to a first rate cut starting from June. President Christine Lagarde sensed greater tranquility in a less tense environment, while inflation, although mitigated, continues to require attention.

As for the Bank of Japan, in April rates were kept unchanged after the increase in the previous month. On the other hand – we read again in the analysis – the inertia in the last meeting caused a decline in the yen Japanese, bringing it close to the lowest levels of the last 30 years. It seems that the central bank has intervened to strengthen the yen, the initiative brought USD/JPY back below 153, but like similar maneuvers made in the past by other central banks this too does not convince the markets, in fact the exchange rate returned within a few days in area 156.

Inflation unknown

Markets “remain anxiously awaiting any sign that might provide direction future rates of interest by the major world economies. In addition, the inflation situation remains at the center of all attention, as the path towards disinflation does not yet seem entirely clear. The United States and the Euro Area show signs of inflation which, although far from peaks, shows no signs of giving up easily.”

Data on economic activity and growth prospects are also crucial. Despite inflationary tensions and monetary tightening, economies appear to be demonstrating a resistence greater than expected. In this context, the indicators PMI both in the Eurozone both in the UK reflect “moderate optimism, suggesting an expansion in economic activity. Surprisingly, a convergence of data between United States and other major economic areas could strengthen the positions of the euro and sterling against the dollar.”