Where inflation stands and what to expect, overview of 8 major currencies

• Five out of eight major currencies face inflation reports this week.
• With accelerating costs and rising rates, every publication makes a difference to currencies.
• Here is the state of inflation and currencies in a busy week.

Move away Nonfarm Payrolls – jobs and growth figures have taken the back seat in comparison to inflation data, in the US and all over the world. The re-emergence of price increases and interest rate rises to battle them – a paradigm shift – have put the Consumer Price Index releases on the top of the agenda for forex traders. 

Here is an overview of how inflation stands in the main economies. 

US – highest core inflation since Eye of the Tiger

CPI: 8.1%, Interest rate 3-3.25%, next release November 10

The world's largest economy reported headline inflation of 8.1% YoY in September and more importantly, core inflation of 6.6% YoY. That is the highest in 40 years and more than triple the Federal Reserve's 2% target.

It also shows the Federal Reserve's efforts to curb inflation haven't succeeded yet. Following the October 13 CPI release, markets cemented a fourth consecutive 75 bps rate hike from the Fed, coming in November. The chances of another 75 bps move in December have also risen. 

Japan is special

CPI 3%, interest rate -0.10%, next release October 21

Japan has been the outlier in the developed world – clinging onto negative interest rates while the entire world is hiking. That is why the yen is so weak, and interventions have failed to buoy the currency. 

The only way for the yen to rise is for inflation – perhaps coming from imported goods – to boost it. That would allow the Bank of Japan to climb down the tree of ultra-loose monetary policy. With core inflation hardly at 2% and headline inflation at the lower end of its peers, a significant increase is needed. 

Eurozone at double digits, from Russia with love

CPI 10%, interest rate 1.25%, next preliminary release October 31

Pointing the figure at Putin, Vladimir Vladimirovich, is probably the right thing to do. While employment is high and wages are rising, Europe's core inflation is only at 4.8%, while headline CPI is at 10%. The final read on October 19 will likely confirm it. High energy costs are the main culprit for rising prices, and they are set to cause economic pain.

That means a limit on how much the ECB could raise rates. It is expected to hike them by 75 bps on October 27, but will probably slow down afterward. Hawks at the Frankfurt-based institution will look for any uptick to justify bigger moves in December, raising the ceiling for the final rate.

UK suffers from the worst of all worlds

CPI 9.9%, interest rate 2.25%, next releases October 19

Britain suffers from high energy prices like Europe – exacerbated by low gas storage capacity. That has sent headline inflation to 9.9% in August, but the report for September is projected to push it back to 10%. Core inflation is also an issue, at 6.3%. 

High prices are set to trigger a big rate hike from the Bank of England, probably 75 bps on November 3. However, it could be higher if the government fails to get its act together and cut costs. 

Britain's volatile political environment and market sensitivity to debt, as if it were an emerging market do not imply that inflation reports have no impact on the pound. On the contrary – amid the chaos, the BOE could cling to inflation as the sole driver of policy, moving away from the political mess.

Switzerland is itchy on (low) inflation

CPI 3.3%, interest rate 0.50%, next release November 4

Switzerland is relatively immune to rising energy costs that have engulfed the old continent, and high wages in the rich nation mean they have limited room to rise. Moreover, the mountainous nation struggled to prevent deflation, so inflation hardly caught up.

Nevertheless, the Swiss National Bank acted to bring interest rates out of the abyss of negative levels and seems keen to continue doing so – even if inflation moderates, as seen in the last report, when monthly inflation slipped by 0.2%. Further rate hikes are likely and the franc remains sensitive to the next CPI print. 

Canada lags behind the US, prices of homes hurt

CPI 7%, interest rate 3.25%, next release October 19

It took more than a decade, but predictions of a Canadian housing bubble to burst have finally come true. The negative prints on home prices somewhat overshadow the 7% annual inflation rate and 5.6% on Core CPI, both over 1% below the US.

Nevertheless, any increase in prices – stemming from US imported goods or other costs – will likely trigger rate hikes from the Bank of Canada and shocks to the Canadian dollar. The BoC lifted borrowing costs by 100 bps in July, shocking the word, and is on the path of slowing down. The pace of this deceleration depends on inflation. 

Australia leads, this time down under

CPI 6.1%, interest rate 2.60%, next release October 26

Scenes from Sydney's New Year celebrations are broadcast to the rest of the world, which is still counting down. Australia also seems to lead in exiting the tightening cycle. It surprised with a mere 25 bps hike last month – but that should not have been a surprise. The Reserve Bank of Australia had already signaled it would be slowing down, and for good reasons. 

Inflation is only at 6.1%, lower than in the US, Europe and the UK. As Australia publishes CPI figures only once per quarter, the data coming out on October 26 is critical. It could show a renewed increase in prices, changing the RBA's mind. Australia's inflation figures could provide substantial volatility.

New Zealand fired up

CPI 7.2%, interest rate 3.50%, next release, January 25

Across the Tasman Sea, New Zealand is facing faster inflation – data released on October 18 showed that price rises are accelerating more than anticipated. Yet similar to Australia, it publishes inflation data only once per quarter. That means this latest CPI report will likely continue supporting the kiwi for some time.

The RBNZ had already contemplated bigger rate hikes before the last move, and prospects of surpassing 4% have substantially risen after the data. The kiwi is likely to continue outperforming its peers. 

Final thoughts

Inflation has been growing in importance for markets in 2022, and will likely remain prominent until the end of the first quarter of 2023 or beyond. Any change in CPI is set to have a substantial impact on currency valuations.