Inflation and FX: Input prices in focus
After a generation of low inflation, rising consumer and business costs have leapt to the top of the list of factors influencing FX pricing.
Inflation is working its way into FX pricing in major currencies, primarily through rising real interest rates as central banks become more hawkish in response to persistent inflation.
John Velis, FX and macro strategist Americas at BNY Mellon Markets, notes that since expectations around the US Federal Reserve began to move in a more hawkish direction, the US dollar index has risen over half a percentage point.
The way the major central banks choose to fight inflation … forms the foundation of what could be a volatile year in FX trading
“Given that so much of the inflation we see today is supply-side generated, we are watching input prices closely, as well as prices paid by firms,” he explains. “We are also keeping an eye on labour costs with limited supply resulting in higher wages.”
While there is inevitably a lot of focus on the dollar, other currencies have also done well. The pound has made strong gains against the euro thanks to the Bank of England raising rates in December and February, with more hikes expected this year.