Strategy: Higher inflation to push up inflation expectations further

Danske Research Team Danske Bank A/S

This week we highlighted that we think global inflation is set to surprise on the upside due to the recent rise in commodity prices. Our forecast is for higher commodity prices, but even if we assume an unchanged oil price, it indicates that global G3 inflation could rise towards 2.0% from the current level of 0.4% (see bottom-left chart). We expect this to reduce the deflation scare further, thereby supporting the market pricing of inflation. However, since higher global inflation may not be persistent, as it is driven by volatile commodity prices, we expect central banks to see through higher inflation and stay accommodative. This could be positive for long-term inflation expectations as well, as it would be a sign to the markets that the central banks take their remits seriously.

In the euro area, we expect inflation to reach 1.5% early next year, which will be the highest since mid-2013. While the market has started to price higher near-term inflation, longerdated inflation is still priced very subdued. Our 2017 forecast is much above the current pricing (see bottom-right chart) and in our view the risk of upside inflation surprises is underpriced as long-term euro inflation pricing is affected by spot inflation. Higher inflation expectations will of course be welcomed by the ECB but we expect the ECB to maintain an accommodative monetary policy until it sees a convincing upward trend in underlying inflation. A majority of the ECB members, including ECB president Draghi, has seemed eager to kill the recent tapering rumours.

Download The Full Strategy

Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.