Inflation expectations in the euro area have collapsed. At one point, the market was only expecting inflation of just over 1.5% in a year's time – well below the ECB's inflation target. However, this was probably only a brief excursion into such low territory. In the past few days, expectations have corrected again, and in a year's time, inflation is now expected to be around the level seen at the end of August, Commerzbank’s FX analyst Michael Pfister notes.
Real economy is the key factor for further interest rate cuts
“Correction is likely to be driven mainly by the sharp rise in the price of oil. Last week, the price of oil rose by almost $8 per barrel on the back of rising geopolitical tensions in the Middle East, which explains the rise in inflation expectations quite well. The link is also understandable: when the oil price rises, so does inflation. And now the oil price is roughly back to the level seen at the end of August.”
“Interest rate expectations have indeed corrected in recent days, but not during the period of the stronger oil price increase. During this period, rate expectations remained rather unchanged. Rate expectations only corrected after Friday's surprising payrolls, after which the market priced out a rate cut of around 25 bps. However, this tends to affect the long end; for the next 2-4 meetings, a rate cut at each meeting seems to remain the base case.”
“Inflation expectations did not rise due to the payrolls, but were driven by the oil price. At the same time, interest rate expectations were not corrected due to higher inflation expectations, but only due to the US payrolls. The market now seems to have fully bought into the story that the real economy, rather than inflation, is the key factor for further interest rate cuts.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD declines toward 1.0950 ahead of FOMC Minutes
EUR/USD stays on the back foot and retreats to the 1.0950 area on Wednesday, pressured by the renewed US Dollar (USD) strength. Investors wait for the Federal Reserve (Fed) to publish the minutes of the September policy meeting.
GBP/USD trades at multi-week lows below 1.3100
GBP/USD is trading close to multi-week lows below 1.3100 on Wednesday. The US Dollar adds to recent gains as the risk mood continues to sour. The outcome of the US Treasury's 10-year note auction and FOMC Minutes could drive the pair action later in the day.
Gold loses its shine, approaches $2,600
Spot Gold fell to $2,604.66 on Tuesday, bouncing modestly afterwards. The XAU/USD pair nears such a low early in the American session as investors await the FOMC Meeting Minutes and Fedspeak.
Fed Minutes Preview: Details on decision to trim rates by 50 bps in September take centre stage
The Minutes of the Fed’s September 17-18 policy meeting will be published on Wednesday. Details of Jerome Powell and co’s decision to trim interest rates by 50 basis points taking centre stage.
RBA widely expected to keep key interest rate unchanged amid persisting price pressures
The Reserve Bank of Australia is likely to continue bucking the trend adopted by major central banks of the dovish policy pivot, opting to maintain the policy for the seventh consecutive meeting on Tuesday.
Five best Forex brokers in 2024
VERIFIED Choosing the best Forex broker in 2024 requires careful consideration of certain essential factors. With the wide array of options available, it is crucial to find a broker that aligns with your trading style, experience level, and financial goals.