Market-based inflation expectations, critical for central bank policymakers, have moved to new cycle highs in both the US and Europe over the past month
A strengthening US dollar has been in the making for a few weeks and traders have finally managed to push the world’s reserve currency to multi-month highs over the last few sessions.
The well watched Dollar Index hit its highest level since early July last year, mainly on the back of an exceptionally strong US inflation release. This follows a period of consolidation for the index, during a longer-term uptrend that has been in place since June.
Inflation is certainly taxing everyone at the moment, from the Biden administration to major companies and their ability to pass on rising costs to small households juggling the increasing costs of living.
Price rises across the globe are becoming more broad-based and they are not only driven by surging energy and food prices. Moreover, market-based inflation expectations, critical for central bank policymakers, have moved to new cycle highs in both the US and Europe over the past month.
Other important data has also surprised to the upside recently, with the monthly US jobs figures and retail sales beating consensus estimates. Labor shortages persist and are pushing up wage inflation to the highest level in ten years.
Meanwhile, the US consumer looks to have got through the summer “soft patch” with October data revealing that shoppers were accepting higher inflation. That said, they may be front-loading their purchases before prices get higher or supply disruptions become more severe in the build-up to the peak holiday season.
Questions are increasingly being raised about how long the Federal Reserve can hold US interest rates at record lows. Traders are now betting that strong consumer demand could add to inflationary pressures and this will push the US central bank to raise rates sooner than expected.
Questions are increasingly being raised about how long the Federal Reserve can hold US interest rates at record lows
The first rate rise has been brought forward from 2023 to the middle of next year. The cautious stance adopted by the Fed at its recent meeting is also slowly being changed, as more officials tell us they are cognisant of the inflation challenge.
The big move in the US dollar has not seemed to affect the oil price as yet. Markets continue to lack direction with conflicting signals on both the demand and supply side. Traders await any signals from the US administration on whether it will release oil from the Strategic Petroleum Reserves.
While this would only offer some short-term relief to the market, the reluctance by the US may be due to the market outlook generally being more balanced next year. A release from the reserves could potentially see OPEC+ counter this by delaying their supply increase.
OPEC has made it clear they will stick to their cautious approach of gradually ramping up their output. Rising Covid restrictions in Europe may also hamper demand as the region battles a potential fourth wave of the pandemic.
Hussein Sayed, Chief Market Strategist at Exinity Group
Follow us on
For all the latest business news from the UAE and Gulf countries, follow us on Twitter and LinkedIn, like us on Facebook and subscribe to our YouTube page, which is updated daily.
by Edward Liamzon
More of this topic
Dollar breaks to new highs as inflation soars
Market-based inflation expectations, critical for central bank policymakers, have moved to new cycle highs in both the US and Europe over the past month
A strengthening US dollar has been in the making for a few weeks and traders have finally managed to push the world’s reserve currency to multi-month highs over the last few sessions.
The well watched Dollar Index hit its highest level since early July last year, mainly on the back of an exceptionally strong US inflation release. This follows a period of consolidation for the index, during a longer-term uptrend that has been in place since June.
Inflation is certainly taxing everyone at the moment, from the Biden administration to major companies and their ability to pass on rising costs to small households juggling the increasing costs of living.
Price rises across the globe are becoming more broad-based and they are not only driven by surging energy and food prices. Moreover, market-based inflation expectations, critical for central bank policymakers, have moved to new cycle highs in both the US and Europe over the past month.
Other important data has also surprised to the upside recently, with the monthly US jobs figures and retail sales beating consensus estimates. Labor shortages persist and are pushing up wage inflation to the highest level in ten years.
Meanwhile, the US consumer looks to have got through the summer “soft patch” with October data revealing that shoppers were accepting higher inflation. That said, they may be front-loading their purchases before prices get higher or supply disruptions become more severe in the build-up to the peak holiday season.
Questions are increasingly being raised about how long the Federal Reserve can hold US interest rates at record lows. Traders are now betting that strong consumer demand could add to inflationary pressures and this will push the US central bank to raise rates sooner than expected.
The first rate rise has been brought forward from 2023 to the middle of next year. The cautious stance adopted by the Fed at its recent meeting is also slowly being changed, as more officials tell us they are cognisant of the inflation challenge.
The big move in the US dollar has not seemed to affect the oil price as yet. Markets continue to lack direction with conflicting signals on both the demand and supply side. Traders await any signals from the US administration on whether it will release oil from the Strategic Petroleum Reserves.
While this would only offer some short-term relief to the market, the reluctance by the US may be due to the market outlook generally being more balanced next year. A release from the reserves could potentially see OPEC+ counter this by delaying their supply increase.
OPEC has made it clear they will stick to their cautious approach of gradually ramping up their output. Rising Covid restrictions in Europe may also hamper demand as the region battles a potential fourth wave of the pandemic.
Hussein Sayed, Chief Market Strategist at Exinity Group
Follow us on
Latest News