In August inflation began to accelerate once again across the world’s other major economies — an important recent shift in the global economic landscape. Even with this increase, analysts are calling the rise in inflation modest. Economists are keeping an eye on the increasing divergence between U.S. inflation expectations and the rest of the world. This divergence raises critical issues regarding what monetary policy should look like moving forward.
As we have seen with inflation in the United States, tariffs like this are already seeping throughout the economy and driving inflation even higher. Yet so far, the impact of these tariffs on consumer prices has been surprisingly muted. Tariffs on steel and aluminum are raising prices. Their complete effect on final consumer costs hasn’t been realized yet.
A global inflation watch report indicates that the pass-through of tariffs is ongoing, hinting at potential future increases in consumer prices. As businesses adjust their pricing strategies in response to these tariffs, market participants remain attentive to fluctuations in inflation rates.
In the financial markets, gold has continued to hold strong around $3,650. This market stability is occurring as traders position themselves ahead of the Federal Reserve’s likely next announcement on interest rate hikes. Indeed, the market appears to be positioned for these announcements to have major ramifications on other asset classes, such as commodities and currencies.
In the currency markets, we have witnessed dramatic activity. GBP/USD has jumped to above 1.3600 and thus has hit a new two-month closing high. At the same time, EUR/USD has spiked above 1.1750, inspired by the resurgence of weakness in US Dollar. This rise in both currency pairs reflects traders’ adjustments to their positions in anticipation of the Federal Reserve’s and Bank of England’s policy announcements later this week.
Because of it, the US Dollar has had a difficult time locating buyers as traders jump in to get out in front of these incredibly important announcements. Worries over inflation and its effect on the Federal Reserve’s hawkishness have contributed to worries over the strength of the USD. In addition, hawkish comments from European Central Bank officials have provided support to the EUR/USD pairing. This buoyant support has supercharged its recent gains even more.
Gold has just bounced off a near-term plunge down towards $3620. This recovery happens to coincide with a notably weak USDollar index, which has provided a supportive floor to both the EUR/USD and GBP/USD trading ranges. Market participants are eager to watch how gold prices move. They understand these changes are frequently just a translation of changes in the strength of the currency – particularly the dollar.
As the major central banks head into their next policy announcements, all eyes will continue to be on market participants. Economic indicators paint a mixed picture, with inflation climbing, though at a moderate rate. Inflation expectations are widening between the US and the rest of the world. This shift brings a new level of complexity, causing traders to rethink their approach.