THINK Ahead: Inflation’s second wave – is history really repeating itself?
The desk posits that the current inflation landscape suggests we may be on the cusp of experiencing a 'second wave' of inflationary pressures, reminiscent of historical patterns. Per the full note from ING Economics, there is increasing concern that inflation may be more persistent than previously anticipated due to a mix of factors including supply chain disruptions and elevated consumer demand. Notably, core inflation metrics remain elevated above central bank targets, with recent readings illustrating that inflationary dynamics are proving to be sticky. While no high-impact calendar events loom ahead, traders should stay mindful of evolving trends that could impact monetary policy.
What the desk is arguing
The desk argues that inflation is likely to reemerge as a significant economic factor, drawing parallels to previous inflationary cycles observed in history. Per the full note from ING, this suggests an impending risk that could influence central bank policies and market movements.
Recent data reveals that various inflation indicators, particularly in developed economies, remain stubbornly above target levels. For instance, core inflation across the Eurozone has hovered around 5%, well above the ECB's goal of approximately 2%, highlighting the potential for further rate hikes if these trends persist.
The alternative read would be that recent tightening measures by central banks could effectively tame inflation, leading to reduced rates sooner than expected; however, historical data indicates that inflation can often take time to subside, complicating immediate assessments.
Where it sits in our coverage
Currently, our consensus target for the EUR/USD stands at 1.075, with a range between 1.04 and 1.12. Noteworthy firm targets include:
Given the analysis from the desk, our outlook aligns closely with JPMorgan's position, suggesting we may be at the higher end of the projected range with implications of further inflation driving rates.
How other firms see it
Firms such as JPMorgan are aligned with the current inflationary concerns, emphasizing potential rate adjustments. In contrast, BofA takes a more cautious stance, suggesting that inflation could stabilize sooner than expected.
For traders, keeping an eye on the Eurozone's CPI readings and the upcoming ECB meetings will be crucial, as these will provide insights into how monetary policy may shift in response to inflation trends and economic data points.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01A second wave of inflationary pressures is anticipated, drawing from historical inflation cycles.
- 02Core inflation trends, particularly in the Eurozone, remain significantly above central bank targets.
- 03Market implications could prompt central banks to reconsider rate strategies.
- 04No high-impact calendar events are expected in the immediate future.
Market implications
Traders should monitor core inflation data closely, particularly in the Eurozone, as it may catalyze further action from central banks that could impact the EUR/USD rate. Additionally, any upward surprises in inflation prints could solidify market positioning toward a hawkish outlook.
Risks to this view
Should inflation metrics start to show signs of substantial decline, particularly amid tightening monetary policies, it could lead to a reversal in the current thesis of inflation persistence. A significant shift in consumer confidence or spending could also undermine inflationary expectations.
Sources & References
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