The Euro comeback
The view of our economists on the current inflation/stagflation debate and the implications for EUR, USD and GBP.
> in supply lines and personnel shortages, combined with demand fuelled by fiscal and monetary measures are factors that are exerting upward pressure on inflation.
> At the same time, higher inflation is reducing purchasing power, as a result of which economic growth is falling back. In addition, the fiscal stimulus is waning and production bottlenecks are also depressing growth.
> This has culminated in a form of stagflation, with inflation remaining stubbornly high. Central banks are therefore concerned that an inflationary psychology will take hold, which will also result in accelerated wage increases. This will subsequently trigger a wage-price spiral.
> In order to prevent this, central banks will have to give off a sign that they will not allow inflation to rise to far higher levels. This can be achieved through accelerated tapering or rate hikes, if only to a limited extent. The inflation risk is the highest in the UK, followed by the US. The risk is the lowest in Europe and Japan. At the same time, corona infection rates have resumed an uptrend almost everywhere, as a result of which central banks are not keen to rush monetary tightening.
> The markets are already pricing in accelerated tightening in the US. This is weakening the euro. However, it increasingly looks as though monetary tightening will only be evident to a very limited degree in the period ahead. Because of the towering debts, the Fed prefers to risk higher inflation, rather than taking risks with growth. This is why the Fed will probably only want to issue warnings against inflation.
> Against this background, it seems likely to us that the appreciation of the dollar against the euro is largely over for now.
Please have a look at our Hedging Perspective for a more detailed view of where FX pairs are heading.