Recent US inflation data has reheated the interest rate market and expectations for possible rate hikes, which could translate into a strengthening of the US currency and a sharp weakening of the euro.
In the third week of November, the euro remained below $1.1500, its lowest level since July 2020. This happened under pressure from expectations that the European Central Bank will maintain its dovish stance in the near term amid a slowing economy.
However, ECB policymakers acknowledge that the decline in inflation may be slower than previously thought, and in turn, the rise in inflation may not be all that temporary. On the other hand, rising inflation seems to affect consumer sentiment in a negative way. Therefore, for example in the USA, an overlapping increase in interest rates could further spoil the mood due to rising loan payments. Hence, the Federal Reserve's decision will not be easy, and recent statements by FOMC representatives may indicate that the Fed should not chase inflation with interest rate hikes.
UK inflation highest in 10 years?
The British pound strengthened to above $1.34, rebounding early in the third week of November from the 11-month low reached last week. Underlying the rebound may be hopes that Britain and the European Union will reach an agreement on the Northern Ireland trade dispute.
Investors are waiting for new clues about the British economy. Last week, the Bank of England dismissed concerns about an interest rate hike. This week's data is expected to show that the U.K. unemployment rate continued to fall over the past three months (July, August and September). October inflation could jump to its highest level since 2011, and retail sales could rebound after five straight months of declines.
Negative news for the yen
Japan's GDP contracted by an annualized 3 percent in Q3, much more than the consensus forecast (0.8 percent). The reasons? Global supply disruptions hit exports and business spending, and new COVID-19 cases dampened consumer sentiment.
Haruhiko Kuroda, governor of the Bank of Japan, pledged at a Monday press conference to maintain loose pandemic-era monetary policy despite the central bank's forecast that inflation is expected to rise to near 1 percent by mid-2022 and the Japanese economy is expected to return to pre-COVID levels in the first half of next year.
All of this could put Japan's currency under pressure. One dollar is worth nearly 114 yen today.
Daniel Kostecki, director of the Polish branch of Conotoxia Ltd. (Forex service Cinkciarz.pl)
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