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US Dollar Remains Well Supported following Higher (Near-Term) Global Inflation Pressures

The past week has seen further evidence of near-term global inflationary pressures. The US Dollar rallied across several major currencies, with the US Dollar Index breaking above 95.00 for the first time in 12-months following concerns over rising inflation rates and drop in risk sentiment. The US Dollar traded at the strongest levels against the Euro in 16-months following higher than expected Consumer Price Index (CPI) Data. The CPI topped 6%, resulting in rises in US treasury yields and speculation that the Federal Reserve (Fed) may pick up the pace on tapering asset purchases. The Fed’s preferred indicator is the core inflation rate, which excludes food and energy prices. Core inflation was reported to have increased to 4.6%, the reading shows inflation is running at its quickest pace since June. The pace of inflation rates sparked the largest sell-off in (short-term) US government debt since the global market turbulence in March 2020. Fed Chair Jerome Powell recently stated that some aspects of overall inflationary pressures remain ‘transitory’ and will subside in mid-2022. However, yesterday’s reading will increase the pressure on the Fed to tighten monetary policy sooner. Market expectations of the first US interest rate rise have moved from 2023 to the middle of 2022.

The economic calendar looks relatively light following the release of key economic figures last week. Market’s attention will turn to the release of retail sales figures and industrial production in October and for further guidance over the pace of the economic recovery.

European Central Bank (ECB) Forecasting Modestly Higher Inflation in 2022

There was little in the way of Eurozone Macro-Economic Data last week to provide markets with guidance for the single currency. The Euro was, however, in the most part weighed down by expectations that the ECB would maintain an accommodative stance to monetary policy in 2022. Notably, ECB member Klaas Knot commented earlier in the week that conditions for a rate hike are very unlikely to be met in 2022, despite higher energy prices and supply bottlenecks lasting longer than expected. He further noted that Eurozone inflation is likely to fall below 2% towards the end of 2022 but the Central Bank should prepare for upside scenarios. As a result, we saw (EUR) Euro / (USD) Dollar move lower to the 1.1500 handle.

The European Commission released its Economic Forecasts on Thursday, which saw 2021’s Gross Domestic Product (GDP) growth revised up to 5% from 4.3% prior. Brussels now predicts 2022’s GDP growth to read 4.3% from an initial forecast of 3% a year ago. Aside from GDP, CPI inflation forecasts for 2021 were revised to the upside to 2.4%, 2022 CPI is predicted at 2.2%, and 2023 dropping below the 2% target to 1.4%. Looking at currency impact, it was relatively limited for the Euro.

Looking to the week ahead, the economic calendar remains light so the focus will be given to ECB President, Christine Lagarde, who is scheduled to speak later in the week.

Sterling Remains Subdued following Mixed UK Economic Data

The Sterling came under pressure last week and remains subdued against several major currencies including the US Dollar. The release of UK GDP data on Thursday reported that the economy grew at a monthly increase of 0.6% and a rise of 1.3% Quarter over Quarter (Q/Q) for Q3. The print was slightly below consensus for 1.5% and significantly lower than 5.5% in Q2. A slowdown in the pace of growth in the second half of the year was expected as the boost from economic reopening in services in Q2 would not be sustained. However, there is widespread evidence that supply bottlenecks are hampering the ability of many businesses from meeting strong demands, slowing the pace of economic recovery. Last week’s economic releases also reported that industrial output also unexpectedly shrank in September, putting further pressure on Sterling following the decision of the members of the Bank of England (BoE) to keep UK interest rates on hold last week. On the latest Brexit front, UK and EU negotiators will continue to engage in talks this week to try and resolve the issues surrounding Brexit’s Northern Ireland Protocol.

Looking ahead to this week, focus domestically will turn to key economic data, including updates for inflation and employment rates. Annual headline CPI inflation is expected to increase from 3.1% towards 4% in October and is set to peak near 5% in the coming months. UK Employment Data, which is due for release on Tuesday, will draw markets attention and highlight September’s figures. However, additional focus is likely to be given to next month’s release which will reveal how unemployment fared in October, after the end of the furlough scheme. Elsewhere on the economic calendar, UK retail sales and Growth from Knowledge’s (GfK) Consumer Confidence data are also due next week, and Monetary Policy Committee (MPC) members Bailey, Mann, and Saunders will testify to the Treasury Select Committee on the latest Monetary Policy Report.

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