Coming rate hike in the US
The US is set to officially begin its rate hike cycle, with Federal Reserve Chairman Jerome Powell saying last week that he would recommend a quarter-point rate hike at the two-day Federal Open Market Committee meeting on March 15-16. The Federal Reserve is expected to remain cautious about raising interest rates and may not raise them at every FOMC meeting this year, according to economists surveyed by Bloomberg, as volatility in financial markets continues amid uncertainty over Ukraine, increased sanctions against Russia, and soaring commodity prices. There may not be a single 50 basis point hike this year, with economists expecting four or five rate increases this year.
Due to the Russia-Ukraine conflict, the Euro has fallen 4% against the US Doller in two weeks. Annual Euro area inflation was at a record high of 5.8% in February, with energy inflation running at 31%. Normally, exporters are glad to see the Euro weakness with a 2% inflation target that can hardly be met. But now the inflation rate is over 5% because of the record-high energy import price caused by the Russia-Ukraine conflict.
ING Bank analysts do not consider the Euro “screamingly undervalued”, attributing its fall to diverging rate-hike expectations with the Federal Reserve, and hefty outflows from equity markets. In fact, it is likely that it is only the beginning, not the end. Because of the black swan event of the Russian-Ukrainian conflict, the risk of EUR/USD exchange rate falling below parity is increasing.
For businesses operating internationally, these exchange rate fluctuations can have severe impacts. Especially SMEs may not be ready to offer the necessary service in the most cost-effective way. Many SMEs work with local partners instead of taking direct charge of their overseas sales.
With the huge fluctuation of exchange rates being a major focus in 2022, cross-border businesses should optimize operations to deal with currency conversions to avoid losing their margins. Picking up the best timing to do stock or push sales makes huge differences in importer’s or exporter’s revenue.
Dr2 Consultants Shanghai can help navigate your international business in dynamic and changing environments. Please do not hesitate to contact us at firstname.lastname@example.org for any inquiries.