16.09.202215:25 Forex Analysis & Reviews: An increase in interest rates leads to a recession in the global economy

While the pound is updating the next annual lows and heading towards the 13th figure, and buyers of the European currency are trying their best to buy the lower border of the side channel in the area of 0.9950, the World Bank has published a report from which it can be seen that the world economy may face a recession next year, which will be caused by an aggressive wave of monetary tightening.

According to a study published yesterday, policymakers worldwide continue to actively curtail soft monetary and fiscal support at the fastest pace that has not been seen in the last half-century. According to the forecasts of the bank's economists, this will lead to more serious than expected consequences in the form of worsening financial conditions and a deepening global growth slowdown. Investors expect central banks to raise monetary policy rates to almost 4% next year, double the average in 2021. It is necessary to do this to keep core inflation at 5%. According to the World Bank forecast, rates could rise to 6% if central banks try to regulate inflation within their target ranges.

According to World Bank estimates, in 2023, global gross domestic product growth will slow to 0.5% and decrease by 0.4% per capita, corresponding to the technical definition of a global recession. According to economists, this will interrupt the recovery long before economic activity returns to its pre-pandemic level. "Policymakers can shift their focus from reducing consumption to increasing production," said David Malpass, president of the World Bank Group of Organizations. "Policies should attract additional investment and increase productivity and capital allocation, which is crucial for economic growth and poverty reduction."

The World Bank has presented a way to help achieve good results in controlling inflation without causing a global recession: The first thing central banks need to do is clearly communicate policy decisions to help fix inflation expectations and reduce the necessary tightening. While central banks in advanced economies should be mindful of the international side effects of tightening while emerging market authorities should build up foreign exchange reserves.

The number of countries tightening fiscal policy is expected to reach the highest level since the early 1990s next year, which will strengthen the impact of monetary policy on economic growth. According to World Bank economists, policymakers should develop reliable medium-term fiscal plans and provide targeted assistance to vulnerable households.

As for the technical picture of EURUSD, the bulls are pushing with all their might and do not want to surrender the market. The euro fell in the morning but recovered from the side channel's lower border. Currently, the nearest target for buyers is the resistance of 1.0020. Only its breakthrough will give buyers of risky assets confidence, opening a direct road to 1.0050 and 1.0090. The farthest target will be the 1.0120 level. If a further decline in the euro and a breakthrough of the lower border in the area of 0.9935, buyers will certainly show something in the area of 0.9900. But, having missed this level, the pressure on the pair will only increase, strengthening the bear market, which can push the trading instrument to the lows: 0.9870 and 0.9810.

The pound also collapsed below the 14th figure and continues its decline, clearly aiming for new annual lows. Only after returning to 1.1400 can we expect that buyers will begin to act more actively. This will create quite good chances for a larger upward correction, which will open a direct road to the area of highs: 1.1440 and 1.1480. The farthest target in the current bullish movement will be the 1.1520 area. If the pressure on the pair persists, buyers will have to try very hard to stay above 1.1350. Without doing this, you can see another major sale to 1.1310 and 1.1260.