Currency Point: Consumer Price Action

Buckle up for a week of new multi-decade highs in consumer price indices. This week sees, Australia, Germany, France, Italy, Japan and the US releasing core consumer data. Yes, the US data is PCE but this is the Fed’s preferred measure of inflation.

The question particularly for Eurozone countries is how many will enter the realm of double- digit year on year inflation. Spain already has, Italy is very likely to join them. Germany and France are on the cusp of hitting mid to up 9s with winter heating needs in the coming 6 months the next real test for the EU and its inflation tsunami.

That tsunami has seen the ECB finally joining the rate hiking party lifting its policy rate 50 basis points to 0.5 per cent. It’s the first rate rise from the ECB in 11 years. The deposit rate is finally back to neutral too at 0.0 per cent. That 50bp increase was above market expectations as the “Governing Council’s updated assessment of inflation risks and the reinforced support provided by the TPI for the effective transmission of monetary policy" warranted a sharper increase. The Board has also foreshadowed further rate rises at upcoming meetings are likely with decisions taken on a meeting-by-meeting basis.

Leading into the ECB meeting expectations had grown that the board would raise rate so the EUR had already retaken parity against the USD. However when the higher than expected rate rise was announced it was a muted move as the ECB also announced a ‘new mechanism’ to help indebted EU nations through higher borrowing cost.

This new bond purchasing tool (TPI) is also counter price fragmentation among countries’ bonds. What is also telling is the program is potentially unlimited as no determinates or timeline have been placed on it. It is purely for ”counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area”

President Christine Lagarde implied there are further ECB surprises: “We are much more flexible, in that we are not offering forward guidance of any kind.” This has the EUR under review as uncertainty in policy means volatility in trading. Safe-havens remain the better options in the current market particularly the USD and CHF however the coming week is likely to be pair specific as CPI read drop and trader evaluate the profits they hold in the USD. Watch for gapping and stop triggers.

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