Forex in this article
?? Corona crisis entails extremely expansive monetary policy
?? Fed Tighter Rate Announcement Leads to Cryptocurrency Bloodbath
?? ECB remains confident of controlling inflation The corona pandemic continues to have the world in its grip and is having a major impact on the politics and economies of different countries. In order to keep the infection rates with the highly contagious virus as low as possible, contact restrictions and entire lockdowns have been imposed in the past – with far-reaching consequences. There are still delivery and material bottlenecks that are weighing on the economy. In addition, the various central banks around the world designed their monetary policy extremely loosely to cushion the crisis in order to help struggling companies with cheap money through the pandemic. For example, the US Federal Reserve surprisingly lowered its key interest rate to a range of 0 to 0.25 percent in March 2020 in the wake of the corona crisis, which corresponded to a full percentage point less than before the crisis. In addition, a trillion-dollar bond purchase program was approved, which should help the market with additional liquidity. The ECB also decided to react to the corona crisis with various monetary policy measures and passed the €1,850 billion pandemic emergency purchase program PEPP. However, since the key interest rates of the ECB were already at a historically low level before the corona crisis, there was no improvement here.
Inflation rises and rises
However, one consequence of this extremely loose monetary policy, coupled with delivery bottlenecks and skyrocketing raw material and energy costs, is increasing inflation. In the US, it was 6.8 percent in November 2021, the highest level since 1982. And the euro area is also feeling the effects of rising consumer prices, with a year-on-year increase of 5 percent in December 2021, the highest rate since the introduction of the euro. This has prompted the US monetary authorities, who had initially assumed that the high inflation would level off on its own, to reconsider their corona monetary policy course. This became clear when the minutes of the most recent central bank meeting were published in early January. Market participants can expect three interest rate hikes this year. The Fed’s total assets are also expected to be reduced after the first rate hike.
Stock and crypto markets plummet after Fed announcement
The prospect of a tighter course sent the stock markets, especially tech stocks, down. However, not only the riskier growth stocks suffered from the interest rate fears of investors, the crypto markets also went down deeply with the Fed’s announcement. Bitcoin recently fell below the psychologically important $40,000 mark via Bitstamp. Other cryptocurrencies also came under great pressure. Altcoin Ether, for example, was trading below $3,000 again. Additionally, the market cap of the crypto market fell below the $2 trillion mark via CoinMarketCap. Do you want to invest in cryptocurrencies? Our guides explain how to do it within 15 minutes:
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ECB keeps its feet still
A key question for crypto investors is when the ECB might decide to raise interest rates again, as this could have a similarly disastrous effect on crypto markets. Last but not least, digital currencies have increasingly established themselves as inflation protection in recent years and have also increasingly competed with the shiny precious metal gold. So far, however, the European monetary authorities have been keeping a low profile when it comes to saying goodbye to the Corona crisis mode. The ECB continues to assume that the high rates of inflation are due to special effects and are likely to slow down on their own this year. However, as ECB Council member Klaas Knot revealed to the Dutch daily Trouw at the end of 2021, interest rate hikes in early 2023 are conceivable.
For the time being, crypto investors should therefore continue to worry and wait and see whether the ECB will allow itself to be pressured by its US colleagues and yet decide to raise interest rates earlier than expected. The first new insights could follow in early February when the Governing Council meets for its next meeting. Editor finanzen.net Image sources: Jorg Hackemann / Shutterstock.com, telesniuk / Shutterstock.com
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