Inflation Worries Dominate Central Bank Agendas Across the Globe

This week will witness meetings of several central banks from both developed and developing countries. Decisions on interest rates will be made by the Federal Reserve (Fed), the Bank of England, the Bank of Japan, the Central Bank of Brazil, the Central Bank of Turkey, and several European economies. Investors are struggling to shift their focus away from the topic of inflation, despite positive signals in recent months, as the rise in oil prices serves as a grim reminder that increasing basic costs, primarily fuel prices, will gradually seep into consumer inflation, triggering second, third, and so on rounds of inflation. However, forecasts for real output remain unchanged or are even revised downward, which, of course, raises concerns about stagflation risks. For instance, the European Central Bank (ECB), in its recent meeting, raised rates by 25 basis points to 4.5% while lowering growth forecasts for this year and the following two years. Christine Lagarde, during the press conference, stated that economic risks in the EU are beginning to lean towards the downside. The absence of optimism in the statement, coupled with stricter access to credit, left a gloomy impression on the markets, leading to a drop in the euro against the dollar to its lowest point since mid-March of this year:As seen in the chart above, the price is clearly gravitating towards this year's minimum level of 1.05. If there are any rebounds, they are relatively weak, and sellers dominate with confidence. Moreover, the EUR/USD pair has broken its main upward trend channel since the end of September, so there is a kind of consensus in the market that sellers should finish their job first. If the Fed delivers a balanced statement this week and maintains an optimistic outlook for the American economy, while also keeping the prospect of another rate hike by year-end, sellers will likely attempt to push EUR/USD towards the round level. Buyers are also likely to refrain from medium-term purchases until the price reaches a more logical potential reversal point – this year's minimum.Overall, the market is once again showing dynamics that, in one way or another, express concerns that inflation will persist longer than previously expected: unstable positions of currencies of countries relying on resource imports, especially oil, rising yields on sovereign debt, despite increasingly transparent hints from central banks that they are on the verge of completing policy tightening. And, of course, the strengthening of the dollar against all currencies, which usually occurs when the overall risk aversion in the market increases, and the dollar is perceived as a safe haven asset. Real interest rates in the United States, starting from mid-August, also an important indicator of expectations for the expansion of the American economy, suspiciously consolidates near 2%, while nominal yields continue to rise.