Inflationary pressures - where next for USD EURO and GBP?

Global economic growth paths are on increasingly rocky roads, with inflation, Covid outbreaks, Covid support measures and country-specific problems all coming to a head. Economists are not trying to predict the future, only to predict differentials – which is why every data-release is now becoming more important to the future path of economic growth & policy. This data-focus may add volatility to an FX market already pushing key levels.

 Inflation: Upward price pressures appear to be real, but Central Banks seem convinced otherwise.

CNBC reports … Despite the Federal Reserve’s assurance that current inflation pressures won’t last, consumers see things differently, according to a survey Monday from the central bank’s New York district.

 Data suggests that inflation is real, immediate and cannot be ignored:

• The June consumer price index, which factors less into the Fed’s decision-making than the personal consumption expenditures price index, is expected to show a 5% year-over-year gain, matching the May21 level, which was the highest since August 2008.

• Stripping out volatile food and energy prices, the CPI is projected to rise 4%, up from 3.8% for what would be the highest since January 1992.

• The June Survey of Consumer Expectations showed that median inflation expectations over the next 12 months jumped to 4.8%, a 0.8 percentage point rise from May and the highest reading in history for a series that goes back to 2013.

 While the outlook for the next three years remained unchanged at 3.6%, that is still well above the 2% level that the US Fed considers healthy for a growing economy.

 Central bank officials have been insistent that the recent inflation spike won’t last – but there are a growing number of doubters!!! They projected at their June meeting that their preferred gauge would show a 3% gain in 2021 but then recede to 2.1% in subsequent years and settle around the target range thereafter.

 For everyone with USD needs, Fed Chair Powell speaks on Wednesday & Friday, expected to maintain the US Central Bank opinion that inflation is transitory’. Any deviation from this rhetoric could see the USD appreciate suddenly, as interest rate hike expectations are brought forward.
Support levels: EUR/USD 1.1794 & 1.1640  ……  GBP/USD 1.3742 & 1.3650

 GBP – under pressure but resilient: A steady increase in COVID-19 cases and related hospitalizations in Britain did not prevent the UK government's plan to end most of the coronavirus restrictions on July 19. However, this increase, along with fresh Brexit jitters, acted as a headwind for the British pound.

 In the latest Brexit-related developments, Brussels and London were locked in a dispute over the size of the UK’s Brexit bill. The EU confirmed on Friday that Britain is liable to pay €47.5bn (£40.8bn) to the Union as part of its post-Brexit arrangements and that the calculation is final (!)

 All eyes on Inflation data published tomorrow, Wednesday. Currently: GBP/EUR 1.1675 …. GBP/USD 1.3850

 China – rebounding & passing inflation on: Great data published yesterday saw a solid rebound in Chinese trade, supportive of a global economic rebound, and perhaps an end to the supply-chain issues of the previous 2yrs. China’s exports grew at a much faster than expected pace in June as solid global demand led by easing lockdown measures and vaccination drives worldwide eclipsed virus outbreaks and port delays.

 Import growth also beat expectations, though the pace eased from May, with the values boosted by high raw material prices, customs data showed on Tuesday. Thanks to Beijing’s efforts in largely containing the pandemic earlier than its trading partners, the world’s biggest exporter has managed a solid economic revival from the coronavirus-induced slump in the first few months of 2019. However, it continues to battle with higher raw material prices and freight costs, which are being transmitted into the global economy and causing inflationary pressures to become real.

 CAD: All eyes on tomorrow’s interest rate announcement and press conference. The Canadian $ has been the stand-out performer against the US$ for the last year, but many expect this to dwindle through H2 2021. The US economy is opening up earlier and had a much larger fiscal package, and although Canada hinted at swift & immediate interest rate hikes, the US may be heading in the same direction, undoing he differential. CIBC have suggested USD/CAD at 1.2700 by Dec21 (currently 1.2450).

 AUD – Covid pressures persist: Disappointed by confidence data this morning, but boosted by Chinese data mentioned above, AUD/USD traded higher at 0.7500. However, analysts at Goldman Sachs take note of the coronavirus (COVID-19) outbreak in Australia's largest city, also the economic powerhouse, Sydney to cut the economic forecasts for the Pacific nation.

 In its latest report, the bank trimmed the Q3 2021 GDP forecast to 0.6% from 1.0% prior. It’s worth noting that Australia registered the biggest daily jump in Covid cases since September the previous day, per ABC News data.