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Dollar rose on Monday as more market participants bet on more serious inflationary pressures at the end of this year and next year. If that happens, an early rate hike in the US will be more likely.
The same is seen in the Euro area, so the European Central Bank carried out its emergency bond purchase program with an unofficial limit of under 50% of each country's debt issuance. Before, the formal limit was 33%, but now the ceiling is around 60%.
These figures were presented by the ECB Board of Governors, and experts point out that it is part of preparations for a crucial discussion to be held in December this year.
Nevertheless, no decisions have been made regarding the scope of the purchase program, and the ECB declined to comment on the bank's stimulus programs.
But it was the support programs that boosted inflationary pressure this year, and it is likely that it will continue to grow next year. The ECB began purchasing bonds in 2015 and back then, a limit was introduced on the share of any country that it will buy from. Then, in March 2020, policymakers launched an emergency program due to the coronavirus pandemic. They said it would not be subject to the previous rules.
Returning to the topic of inflation, latest forecasts say it will grow faster than anticipated, and it will only be in 2023 that the level will fall well below the 2.0% target. After all, CPI is expected to peak at 4.2% this fourth quarter, up from the previous forecast of 3.6%. But next year the rate will fall by more than half, and then drop to 1.6% at the end of 2023.
Most likely, Spain will demonstrate the most rapid growth in inflation, to up to 5.3% this fourth quarter.
As such, most of the leading central banks are hotly debating whether the surge in consumer prices will be short-lived or have a more lasting effect. It is clear to everyone that regulators will ignore short-term inflationary pressures and maintain adaptive monetary policy to spur economic growth after the pandemic. But the steady rise in prices will intensify calls for higher interest rates.
Many expect the ECB to revise its measures at the upcoming meeting in December, but no one doubts that the emergency bond buying program will end in March next year as planned. It is uncertain though what will happen with the usual bond purchase plan, which currently stands at € 20 billion a month.
"As the recovery continues and supply disruptions resolve, we can expect to see a normalization of price pressures on goods and services. We do see that next year's wage growth will grow slightly more than this, but the risk of spillovers remains limited, "Lagarde said." If we were to take any tightening measures now, it could cause far more harm than it would do any good ... "This will severely slow down the economy, while inflation will return to its lower levels in the near future," she added.
As mentioned earlier, the ECB will decide on the future of its monetary policy at a meeting next month. By this time, politicians will have at their disposal all economic data on the labor market, as well as economic forecasts. But Lagarde is firm that a rate hike next year is highly unlikely, which put pressure on the European currency.
Meanwhile in the US, business conditions in the New York Fed rose to 30.9 points, from 19.8 points a month earlier. This is better than what economists anticipated and showed restrained inflation.
The manufacturing sub-index also jumped 8.9 points to a record 26 points, and average workweeks also rose. The decline was only seen in manufacturers' optimism about the future business environment in the next six months.
Technical analysis on EUR/USD
A lot depends on 1.1435 because a breakdown will lead to a fall to 1.1380, 1.1330 and 1.1290. Meanwhile, a return to 1.1435 will provoke a rise to 1.1500 and 1.1560.
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