Post financial crisis we have seldom seen volatility of the extent that we have experienced recently. Certainly, at least not on such a widespread level that has regularly been characterised by simultaneous write-downs in normally negatively correlated assets. Financial headlines last week at least attested to some concrete actions to justify such violent moves in markets.
Trading last week still punished high risk assets as a continued risk-off tone in markets undermined demand and risk appetite in numerous sectors. However, what emerged at least from the perspective of volatility and disturbance in markets was one of the best case and smoothest scenarios possible.
In recent trading sessions, central banks controlling the three major western economies: the Federal Reserve, the European Central Bank and the Bank of England have all changed the backdrop of their economies considerably. The relative calm in markets from a price perspective was largely due to the strong signposting from the central banks to markets allowing participants to position accurately for the announcements.
The Federal Reserve opted for a vanilla interest rate hike but of a magnitude not seen for many decades with a 75 basis-point hike. The ECB provided nothing in its initial announcement but in an emergency meeting tasked the Council to create a brand new mechanism to ease financing conditions in the bloc. The Bank of England also pursued a fifth consecutive interest rate hike.
Despite immense central bank intervention, there may still be a problem: whilst markets listened to the central banks and positioned accordingly, the public is either not listening or not believing what they’re saying. We can see that because the public’s inflation expectations are outstripping the banks’ and professionals’ forecasts. During the era of ultra-accommodative policy, consumer apathy to central banks didn’t matter, now the story is very different. Inflation expectations can be a central bank’s best friend or worst nightmare and the way the public responds to hopefully moderating prices will be key to how each authority can manage the risks within its economy.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Daily Brief – Weren’t Tariffs USD Negative?
Charles Porter
Tue 8 Jul 2025
Weren’t Tariffs USD Negative? The Dollar proved sensitive to headlines regarding trade during the US overnight session. However, contrary to what many commentaries would have you believe, as the risk of tariffs escalated the Dollar rose. The 90-day pause following Trump’s April ‘liberation day’ tariffs had been set to expire this coming Wednesday. To the […]
Daily Brief – Dollar Reserves
Charles Porter
Thu 10 Jul 2025
Dollar Reserves With the passing of Trump’s original deadline for the reimposition of liberation day tariffs yesterday, markets have breathed a sigh of relief. July VIX futures continued to slide lower. Moreover, what may surprise anyone who had been expecting the issue of tariffs to resurface following the passing of Trump’s new deadline, so too […]
Daily Brief – Big Girls Don’t Cry
Charles Porter
Thu 3 Jul 2025
Big Girls Don’t Cry A bond market tantrum and one of the sharpest one day sell offs in Sterling for several years appear to have been catalysed by the Chancellor’s appearance in PMQs yesterday. First: the back story. This Labour government has faced some embarrassment in recent weeks trying to get its welfare bill through […]
