THINK Ahead: Inflation’s second wave – is history really repeating itself?
At a Glance
The desk's thesis revolves around the evolving inflation narrative which recalls the stark inflationary environment of the 1970s, suggesting implications for current monetary policy. Per the full note from ing-think, while there are noticeable parallels in inflation spiking, the structural differences today warrant caution. Crucially, recent data indicate that inflation data is still high, with core inflation hovering around 4.5%, denoting persistent pressures that central banks must navigate. Given this context, traders should stay alert to upcoming policy signals from major central banks as they recalibrate their strategies in response to inflationary trends.
Key Takeaways
- 01Current inflation rates are at 4.5%, echoing the persistent inflation of the 1970s.
- 02Key differences in today's economic structure may dampen similar inflation impacts.
- 03Central banks are under pressure to respond to inflation, impacting future monetary policy.
- 04Traders should focus on the implications of inflation data for currency strategies.
Full Analysis
What the desk is arguing
The desk suggests that the ongoing inflation trend bears resemblance to the 1970s, marked by dual pressures affecting commodity prices and subsequent central bank reactions. However, crucially, this inflationary wave may differ fundamentally due to improvements in supply chain efficiency and energy independence seen in recent decades. Per the full note from ing-think, these structural differences could mitigate the impact of inflation compared to the historical precedents.
Supporting evidence includes recent core inflation statistics, currently at approximately 4.5%, indicating that inflationary pressures remain entrenched. This level is significant, as markets see central banks remaining vigilant to any signs of inflation persistence, which could lead to tighter policy faster than anticipated. The decision on interest rates by the Federal Reserve and European Central Bank will be instrumental going forward.
The alternative read would be that a rapid deceleration in inflation might prompt a quicker than expected pivot to easing monetary conditions, providing a stark contrast to the tightening narrative that currently prevails across many economies.
Where it sits in our coverage
Given the context above, our consensus target for EUR/USD sits at 1.075, with forecasts from notable firms like: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns closely with jpmorgan’s target at the upper end of our expected range, signaling a more bullish outlook on the euro driven by persistent inflation concerns and cautious central bank messaging.
How other firms see it
Firms such as jpmorgan and others perceive the inflation narrative as supporting a stronger euro, while bofa holds a contrary view, predicting weaker levels in the context of progressing economic risks.
Key indicators to watch include the trajectory of core inflation figures and the evolving policy responses from the Fed and ECB, which will likely dictate volatility in the EUR/USD pair as they react to inflationary pressures.
Market Implications
Traders should closely monitor the EUR/USD pair as inflation data continues to roll in, particularly any surprises that could reshape central bank policy forecasts. The next key level of interest lies around 1.075, which could act as a pivot point.
From the original
When inflation spikes, comparisons to the 1970s are never far away. The similarities are striking, but so are the differences, writes James Smith. And be warned! This article contains egregious chart crimes...
Related speeches
4 itemsRates Spark: Markets have shifted to a broader inflation impact
The desk's thesis revolves around the recent shift in market perceptions regarding inflation's broader impact on economic conditions. Per the full note from ING Economics, recent data has indicated a more persistent inflation trajectory, compelling markets to recalibrate their expectations surrounding central bank policy responses. Central banks, in turn, may need to adopt a more aggressive stance as inflation proves to be less transitory than initially perceived, with several indicators pointing to elevated prices persisting across various sectors. This sets the stage for potential volatility across currency pairs, particularly in response to macroeconomic updates as inflation data is likely to drive market sentiment.
THINK Ahead: Inflation’s second wave – is history really repeating itself?
Lead — The desk is positioning for a potential resurgence of inflationary pressures reminiscent of historical trends. Per the full note from ING Economics, the analysis suggests that a second wave of inflation could manifest, challenging current market assumptions about the persistence of price stability. The consistency of consumer price increases, particularly in key sectors, emphasizes the risk of inflation not simply being transitory but rather a systemic issue. Supporting evidence includes recent data points indicating that inflation metrics could surpass previous peaks, generating implications for monetary policy shifts. Notably, central banks may be compelled to reassess their strategies, particularly if inflation persists beyond the expected timeline. This could lead to a heightened sensitivity in FX markets, particularly for currencies sensitive to interest rate differentials. The alternative read would involve dismissing inflation fears due to temporary supply chain disruptions. However, the current pricing trends suggest that such disruptions may have longer-lasting effects, thus complicating this narrative.