Dollar on a wave of inflation expectations (Daily analysis 15.11.2021)

15 Nov 2021 9:02|Bartosz Sawicki

For many weeks the dollar has been strong and the euro weak. The US currency has had a markedly stronger economic growth impulse behind it and relative resilience to energy commodity price rises.

However, the key factor is the central bank, which sends out signals that it will react to inflationary risks. Declines in the euro against the dollar, however, were abrupt for a long time. One step towards a stronger dollar, two steps back, and the EUR/USD could not break through the 1.15 level.

Record inflation puts to rest any hopes of a weak dollar

Only the inflation reading for October provided the trigger for a massive jump in the dollar's value, but also a marked deterioration in investment sentiment. Consumer prices rose at the fastest pace in about three decades and much faster than forecast. The new cyclical highs for inflation growth stand at 6.2% year-on-year. The effect is a growing belief among investors that interest rates in the United States will rise once asset purchases are phased out in a decisive manner and without any sagacity on the part of the monetary authorities. This contrasts sharply with the rhetoric of the European Central Bank authorities, and it has translated into an over 1% strengthening of EUR/USD declines. Quotations were pushed towards 1.14, the lowest since July last year. An attempt at correction may be made from these ceilings, but a 1-1.5% bounce would be needed to change the trend. In the absence of arguments on the side of the common currency, such a raise seems to be unrealistic. This means that a significantly cheaper dollar must be forgotten for the time being.

This week, markets' attention will be focused on retail sales data. Statistics for the US should confirm that the economy enters the fourth quarter on a high note and that demand is weak for China. Weakness in the Middle Kingdom weighs on all emerging markets. The UK inflation reading should renew hopes of a rate hike in December and therefore support the pound. The British currency has recently performed poorly against the euro and the dollar, and it is on these fronts, the potential for a correction is the greatest.

15 Nov 2021 9:02|Bartosz Sawicki

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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