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Worldwide inflation concerns boost dollar, Eastern European currencies

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4 October 2021

Written by
Enrique D├şaz-├ülvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

Last week’s theme in markets continues to be aligned with our views and forecasts: burgeoning inflationary pressures worldwide and the possibility that central bankers, particularly in the developed world, may be already behind the curve in tightening policy.

T
his was particularly evident across Eastern Europe, where hawkish surprises in central bank policy makers boosted most of the currencies there. For now, the rise in US yields and continued ECB dovishness is supportive of the US dollar, which last week rose against every other G10 currency.

The main event for markets this week will be the publication of the September payrolls report in the US. A number of central banks, including those in Australia and New Zealand, will meet this week. We expect a continuation of recent hawkish surprises as inflationary pressures, caused by excess demand over strained supply chains, shows little sign of abating, which should boost the respective currencies.

GBP

Headlines in the UK about shortages and lines at petrol stations cannot be helping the doves in the Bank of England make their case. Consequently, markets are busy repricing expectations for Bank of England moves, bringing them forward to the point where a full hike is priced in during the first meeting of 2022. We think this may happen even earlier.

Sterling has, however, so far failed to benefit substantially from this, dragged down by the euro and the general blow to sentiment on UK assets from the images of queuing and shortages. We expect this to change, and the prospect of sooner-than-expected hikes from the Bank of England should help the pound find a floor, at the very least.

EUR

The inflation report out of the Eurozone delivered yet another upward surprise, even against expectations that had already undergone a significant upgrade in the days leading up to the release of the data. Headline prices rose by 3.4% on the year, the highest rate since before the global financial crisis in 2008. Even the typically sticky measure of core inflation rose to 1.9%, albeit we note that these price increases are largely a result of the base effect.

Soaring energy prices should provide ammunition to the hawks in the ECB, which have been strangely absent of late. This week’s release of the minutes from the meeting will be somewhat stale, but we have a slate of speeches from ECB council members that we will be paying close attention to.

USD

Drama over the debt ceiling in the US seems to us to be one of those non-issues that should be completely ignored by markets. Other than a slight pick up in Treasury bill rates, they seem to have largely done so for now. Far more important is the steady drip of inflationary news; last week’s turn was the personal consumption expenditures deflator (PCE) which again came out above expectations.

This week’s payrolls report out on Friday is expected to deliver another solid, but not quite exceptional, headline of net job creation. We will be looking closely at the wage numbers for signs that employees are finally pushing back against the real wage cuts they have experienced so far this year.

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