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The market's reaction to the inflation report from the US was unusual. The dollar rose effortlessly against other G10 currencies this time around. Still, the true stars of this week were emerging market currencies, with the Brazilian real leading the way. One possible explanation for this dichotomy is the difference between monetary responses to global inflationary pressures. While most G10 central banks are happy to let inflation happen, keeping real interest rates well into the negative, emerging market authorities were less optimistic. They raised interest rates significantly a few months ago. The process of normalising monetary policy is still in its infancy, but the events that took place last week are very interesting.
We expect inflation news and the speed at which central banks normalize monetary policy to continue to be the drivers of currency market trading. This week will be an important week, with inflation reports from the Eurozone, the UK, Canada and Japan. In addition, important speeches will be given by as many as eight Federal Reserve officials and two speeches by ECB President Lagarde.
This week, important data will be published on the labor market and inflation. The labor report will be the first report to be published since the end of the temporary dismissal system. Markets are preparing for another big surge in inflation. There is a chance that the percentage will be above 4% during the high, which we expect will provide a peak in December and support for the Pound. Below are the major currencies in detail.
It was not an exciting week for the Eurozone, as the Euro mainly reacted to news from other regions. Monster inflation in the US in particular caused a spike here. This week, macroeconomic data has also been meager. The focus is on communication from the central bank. Lagarde is set to deliver a speech at the European Parliament on the topic 'From recovery to strength', which will be closely analysed to see whether the ECB will continue to resist market prices of future ECB increases.
Data for the third quarter from the UK showed a reliable annual growth rate of 6.6%. Solid numbers, although they are just a bit lower than expected. The pound has fallen against the US dollar but outperformed all other European currencies as markets have lowered prices due to the 50/50 chance of a spike following the Bank of England's December meeting.
We can't sugarcoat the October inflation report from the US. The headline inflation rate and core inflation have both turned out to be significantly higher than they were originally set off, which was already high. Inflation is now higher than it has been in the past four decades and is hardly expected to change anytime soon. Bonds sold off heavily, causing yields to skyrocket. The dollar has benefited this time from surprise inflation and changing interest rates compared to other developed market currencies. If this week's speeches by Federal Reserve officials don't contradict the expected spikes, the dollar's rise could continue for a while.
By: Enrique Diaz-Alvarez
Enrique Diaz-Alvarez is chief risk officer and heads Ebury's analyst team in New York. Because of his drive, passion and thorough knowledge, Enrique is recognized by Bloomberg as one of the most accurate predictors of market movements.
About Ebury:
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