By Enrique Diaz – Alvarez *
The market response to the explosive inflation report in the US was unusual. This time, the dollar did not have a hard time rallying against its G10 counterparts. However, the real stars of the week were the emerging market currencies, led by the Brazilian real.
One possible explanation for this split is the split between monetary policy and global inflationary pressures. While the G10 central banks are for the most part happy to let inflation soar, keeping real interest rates extremely negative, emerging market authorities were much less optimistic and started raising interest rates sharply several months ago. It is still early in the process of normalizing monetary policy, but last week’s moves are interesting.
We expect foreign exchange markets to continue to trade with news of inflation and the different speeds at which central banks are easing monetary policy.
This week is particularly rich compared to the previous one, with inflation announcements in the Eurozone, the United Kingdom, Canada and Japan. Also important will be speeches by at least eight Federal Reserve officials, and this week’s news will be complemented by two speeches by the President of the European Central Bank Lagarde.
Third-quarter data from the United Kingdom showed a steady annual growth of 6.6%, a steady data point, albeit slightly below expectations. The pound lost ground against the US dollar, but outperformed any other European currency, as markets again rallied with a 50% chance of a first rise at the Bank of England meeting in December. This week, a series of key figures covering the labor market and inflation will be made public. The work report will be the first to be published after the end of the coronavirus temporary leave program. Markets are preparing for another sharp rise in inflation, with a probability of exceeding 4%, which in our opinion will guarantee a rise for December and will work in support of sterling.
It was a mediocre week for the macroeconomic events of the Eurozone and the euro lost ground against the other major currencies. This week, macroeconomic data is also scattered. The focus will be on the announcements of the European Central Bank. In particular, Lagarde will deliver a speech in the European Parliament on “From recovery to power”, which will be read carefully to see if the ECB continues to take a defensive stance on a future interest rate hike.
There is no way to describe the US inflation report for October. The headline of the report and the key interest rate significantly exceeded the expectations for very high inflation. Inflation is now at a four-decade high and few predict a decline soon. Bonds sold out sharply, and for now the path of resistance for bond markets is higher. This time, the dollar took full advantage of the surprise caused by inflation and interest rate movements, at least compared to other currencies in the developed market. If Fed officials who go public this week fail to keep up with recent moves in anticipation of growth, the dollar rally may be short-lived.
* Chief Risk Officer of the international payment company Ebury. The company’s analysts were named by Bloomberg in the first place of the most successful forecasts for the EUR / USD exchange rate in the fourth quarter of 2020.