Temporary inflation?

The EUR/USD is moving in a narrow range as we enter the summer months. The 1.1900–1.2000 level sits in the middle of the 1.1700–1.2300 range that the pair has remained in since the beginning of this year, and it seems the markets see it as the right price. It would take a change in monetary policy by either the Fed or the ECB to shake the parity out of its lethargy. This is more likely in to happen Washington than in Frankfurt but chances are nevertheless slim as, once again, Jerome Powell stated his conviction that inflation in the US is temporary. Mr Powell reiterated that he was not worried about inflation having picked up in the United States, and that it would not last. The Fed Chairman stressed that the central bank would not be raising rates too quickly just because of fears of future inflation. Having jumped 3.8% on an annual basis, inflation in the US excluding agricultural products and energy grew at its fastest pace since 2008. Nevertheless, over one month, it reached 0.7%, against 0.9% in April, slowing down for the first time the beginning of the year, in line with the Fed’s messaging. The publication of final GDP figures for Q1 last Thursday confirmed the solid recovery of the economy with 6.4% growth. The next major release is expected to be the employment figures on Friday, which should confirming the recovery of the US labour market.

In the UK, the Bank of England left its monetary policy unchanged, holding its key rate steady at a historic low of 0.1%. This was a near-unanimous decision by the Board, approved by all members but chief economist Andrew Haldane. There was no change, either, to its £895 billion asset purchase programme. Like the Fed, it expects inflation to accelerate temporarily well above its 2% target. But it says it will continue to monitor the market and will only change its policy when the targets are met – not before. Mr Haldane had previously spoken of a possible tapering of asset purchases of around £50 billion and an earlier-than-expected end to the programme. The fact that the other members all voted for the opposing viewpoint shows that he’s the only hawk on the Board. He will also be leaving the institution at the end of this month. The market, which was hoping for a decision in line with the chief economist’s words, was disappointed and the pound, which had been flirting with 1.4000 against the greenback, has lost 150 points since the meeting last Thursday.

In Russia, Central Bank Governor Elvira Nabiulina voiced her concerns about the unexpectedly drastic rise in inflation in a lengthy television interview. While the market is expecting a 50 point hike, Ms Nabiulina said that the Central Bank would discuss a hike of up to 0.25% to 1% at its 23 July policy meeting. The rate hikes, already 1.25% this year, their possible acceleration and the rise in oil prices are currently driving the Russian currency to the highest levels of the year against the dollar and the euro in this month of June.

Rates are also rising in Mexico. The peso gained nearly 5% against the dollar after the central bank’s surprise monetary hike.  Banxico raised its key rate by 25 basis points to 4.25%, even as economists were expecting a status quo with a statement suggesting future monetary tightening. The institution therefore anticipated expectations in order to counteract accelerating inflation, which reached 5.9% in May, well above the official target of 3%.

Gold has been suffering in recent days from a drop in inflation expectations in line with the Fed’s discourse and the rebound of the dollar. As with the EUR/USD, fluctuations should be limited for the time being, between $1,720 and $1,900 per ounce, depending on the movements of the greenback. The market expects gold to move erratically in the coming months against a backdrop of buoyant growth, risk appetite and uncertainty about the path of US inflation.

As the Nasdaq broke a new record yesterday and on the last day of the first half of the year, a look at the stock markets shows that almost all of them are performing well for 2021. In the United States, the Dow Jones and the Nasdaq gained more than 12%, while the S&P rose by 14.26%.  In Europe, where the smallest increase was in the UK with 9.70%, France was up 18.3%, Frankfurt 14.37% and the SMI 12.38%. In Asia, the increase was less significant, with Tokyo gaining 4.91%, Hong Kong 5.99% and Shanghai 0.05%. Still, all the major markets are in the green this morning.