The data on consumer inflation in America presented on Wednesday raised the question of the need not just to stop stimulus measures, but also to start raising interest rates by the Fed.
According to published data, October's US consumer inflation in annual terms sharply increased to the level of 6.2% from 5.4%. Its monthly October value rose by 0.9%, strengthening the growth rate from 0.4% a month earlier. In fact, inflationary pressure has risen to the level of the autumn of 1990. It can be recalled that amid such an inflation rate, the Fed's key interest rate was 7.5%, which has not been the case for the last 30 years.
It is also important that the "dovish" J. Bullard made it clear in his speech to CNBC that he expects two interest rate increases after the end of the QE program by the end of next year. This is his first time to do this in recent years since 2008, during the last mortgage crisis. In our opinion, this is a strong signal to the market, indicating that the regulator's patience may run out if inflation not only stabilizes at the achieved level but even, perhaps, climbs even higher.
We also believe that the data for November and December may be decisive. If the inflationary pressure does not weaken, then we may see the first increase in the interest rate by 0.25% to 0.50% at the February meeting without waiting for the end of QE.
If this happens, it will be possible to say that a full-fledged financial crisis will unfold in the US with all the ensuing consequences. It should be reiterated that it is the inflation data that will play a leading role and be in the focus of investors' attention until the beginning of the new year.
What should be expected in the near future in the currency market?
We believe that in view of the inflation growth and the fading hopes that it will be possible to improve the situation on the labor market in America, the scales will gradually tilt towards strengthening expectations of an early increase in rates, which means that the yields of treasuries have every chance to continue to grow. This will clearly be the strongest factor supporting the US dollar against major currencies.
In this situation of uncertainty, the demand for safe-haven currencies – the yen and the franc, will increase, which may begin to receive support after a local weakening. Meanwhile, gold may continue to rise to the level of 1900.00 despite the prospective strengthening of the US dollar. Crude oil prices are likely to be under pressure due to the appreciation of the US dollar but will continue to consolidate, approximately, at current price levels in conditions of high demand for oil.
Forecast of the day:
The EUR/USD pair declined below the level of 1.1515 and stays just above the level of 1.1465. We believe that a decline below it will lead to the pair's further decline to 1.1400.
The GBP/USD pair is also under pressure. Its failure to consolidate above the level of 1.3425 will lead to a decline to 1.3300.
