Even central banks don't know where inflation will go

Two weeks are behind us, during which we received further decisions from central banks. Surprises given to the markets (BoE, Norges Bank, previously BoC and Rebuildables), prove that institutions respond to inflation risk. At the same time, it also proves a high level of uncertainty of these entities as to the future path of price growth dynamics.

High inflation and nothing else

At this point, even central banks do not fully know how the situation with inflation will develop. Institutions must therefore be prepared for a possible one rapid abandonment of the original monetary policy plans. In addition, the decisions taken in the past days indicate that the risk now seems to be tilted towards surprisingly high inflation.

The euro reacted with a weakening on Friday to flash PMI data, which they turned out to be disappointing. Market fears of a recession have intensified again. Data on PMI indicate that recovery in the countries of the Old Continent in the coming months is becoming less and less likely. The eurozone economy is likely to shrink in the second half of the year. The PMI for services fell from 55,1 pts. up to 52,4 points The index for the manufacturing sector declined even more to the level of 43,6 points.

A change in ECB rhetoric?

The market will increasingly play on the ECB's “pivot”.. Preliminary PMI results for June could have brought a lot of uncertainty to the ranks of the ECB's Governing Council. The previous forecasts of the institution assumed that in the second half of the year the euro area economy would continue to grow significantly. Publications reduce the probability that the central bank will continue to be very restrictive. There is growing speculation about a change in rhetoric.

Now the focus will be on CPI data from the euro zone. The publication is scheduled for this week. If they surprise on the plus side, it will point to global trend of persistently higher inflation. High readings will fit the picture that currently applies in the UK, Scandinavian countries, Australia and Canada.

In the near term, the currencies that may continue to gain are those whose central banks remain on a restrictive path despite the fact that the economy is starting to slow down sharply.

Source: OANDA TMS Brokers