The stronger ISM services report yesterday triggered some notable moves in markets, notably the typical good news is bad news for risk sentiment. As f
The stronger ISM services report yesterday triggered some notable moves in markets, notably the typical good news is bad news for risk sentiment. As for the dollar, it rallied strongly as rates also shot higher with 10-year Treasury yields still holding on to a key technical level in the form of its 100-day moving average:
The bond market continues to remain one of the major spots to watch in trading this week, with the key level above adding to the tension before we get to the US CPI data and FOMC meeting next week.
I wouldn’t pin too much of the move being a reaction to the ISM services report (that said, there’s always a trigger) but more so about positioning and some reversal flows to the heavy dollar selling over the past few weeks – despite it being from extremely stretched conditions favouring the dollar in the first place.
Essentially, this is perhaps what I would imagine trading conditions to be like next year.
The focus in the market will be on the push and pull between the Fed pivot, recession indicators, and the inflation outlook – at least for the most part. These three elements will make for a very tough picture to navigate and as you can see, just some light talk of above 5% terminal rates for the Fed to start the week is enough to underpin yields.
The balance between the factors listed above is what will set out trading sentiment and while one can expect the Fed to hit a ceiling on rates as inflation
Inflation
Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation.How Does Inflation Affect Forex?The level of inflation has a direct impact on the exchange rate between two currencies on several levels.This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living.The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market.Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market.
Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation.How Does Inflation Affect Forex?The level of inflation has a direct impact on the exchange rate between two currencies on several levels.This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living.The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market.Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market. Read this Term looks to peak, it may not be such a straightforward case for broader markets to react.
A ‘soft landing’ or ‘hard landing’? What happens in the event of an inflation plateau? Will the Fed continue to raise rates beyond market expectations? What will happen to the inflation picture when China fully re-opens? How does a rally in commodities (amid a weaker dollar) factor into the inflation equation?
These are just some of the issues that needs to be taken into account when viewing the market landscape for next year. And to be honest, it certainly feels like we are already there.
