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Euro and pound dipped yesterday due to declining demand for risky assets. Apparently, traders are closing their positions amid growing concerns on the monetary policy, especially now that US inflation is high and interest rates are low. G7 countries are also considering a change on corporate tax rate, which, upon approval, will certainly shake the markets.
Finance ministers are set to meet on Friday to discuss possible tax increases. "We are in the final stages of reaching an agreement," revealed German Finance Minister Olaf Scholz.
Just this week, US President Joe Biden proposed to change the minimum tax to 15%, while for US companies that operate overseas, the rate will be raised to 21%. European countries support this proposition, but insist that large tech companies should pay more tax in the countries where they operate.
With regards to monetary policy, central banks are carefully monitoring the situation because an overheated economy will be a huge problem, not to mention negate all the efforts that have been made to keep countries afloat. And based on the latest data, G7 countries already amassed a record $ 7 trillion debt. The funds were used to fight the pandemic and keep the economy in good shape. Most of the debt is held by central banks, which have aggressively pursued bond purchases. Considering this, officials from both the Federal Reserve and European Central Bank are already discussing how they can reduce bond purchases, all while maintaining a stable economic growth.
Analysts said the biggest problem is that markets are dependent on central banks, which is not good because long-term quantitative easing has unfavorable impacts. In fact, the Fed already said its balance sheet will be gigantic for a long time. For example, it will hit $ 9 trillion by 2023, which is equivalent to 39% of the US GDP. And under various scenarios, the indicator will remain as such until 2030. If that happens, demand for the dollar will collapse very strongly, while demand for risky assets will soar.
On a different note, France released a number of reports yesterday, and one of them is data on consumer sentiment. According to the record, the indicator jumped to 97 points in May, which is what analysts had expected.
Going back to the euro, a lot depends on 1.2180 as a break above it will set off a larger jump towards 1.2220 and 1.2265. Meanwhile, dropping below the level will lead to a collapse to 1.2125.
NZD
As expected, the Reserve Bank of New Zealand kept its interest rate unchanged at 0.25% and its bond purchases at NZ $ 100 billion.
It also said commodity prices grew amid rising global demand, but differences in economic activity both within and between countries remain significant. Economic growth will also depend on whether the country successfully contains COVID-19. As for the short-term economic outlook, upcoming data are expected to turn out much better than the previous forecasts.
With regards to NZD/USD, a lot depends on 0.7310 as a break above it will result in another jump to 0.7420 and 0.7560. Meanwhile, a drop below the level will lead in a collapse to 0.7155.
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