EUR, G10 and Inflation: Levels, Ranges, Targets

Inflation is the least understood monetary concept because it addresses a price level and the proper place for the price level per nation varies widely. What is accepted as 2% in the UK maybe quite different than an acceptable level for example in Australia. Again, Inflation is the 3rd removed cousin to the progression Money supply, interest rates, exchange rates and economic announcements.

Current Inflation in the UK at 3% has seen a rising exchange rate over past months. USD at 2.1% saw a falling exchange rate. AUD/USD lacks complete Correlational association to its interest rates and economic announcements. Its a lost wandering currency pair subject to market price movements to move higher or lower and despite a 1.9% Inflation rate. The correlational mismatch is found in the 1st movements to Money supply and interest rates.

A currency pair against a negative correlation to its interest rates represents a serious problem to the exchange rate and it may take months to years before a situation of this magnitude rectifies itself because of small and contained exchange rate ranges.
Two aspects must occur, either interest rates must raise or lower for the exchange rate to find its proper place. Only then will economic announcements align properly. But only then can Inflation possibly or maybe GDP employ as a direction to exchange rates but a strategy in economic announcements as a trade plan is far removed from time to align to proper exhange rate levels. Over time, a trader may go bust before alignment. View yesterday’s GBP article to see interest and exchange rates to economic announcements.

The question to time and alignment is seen in the latest central bank gimmicks to its interest rate adjustments. The BOE and ECB for example are hard at work on “risk free” interest rates. The USD and Fed just released SOFR as a new overnight interest rate to trade alongside Libor.

When respective markets are open, no mystery exists to trade levels, ranges and targets. But full exchange rate control is known by traders and central banks miles ahead. When markets close then exchange rates are subject to the levels of other nations exchange, interest rate and economic announcements. An exchange rate can easily fall outside the control and acceptable level of a respective central bank. Draghi delivered negative announcements in US markets with intent to drop EUR. If Draghi delivered his remarks before US 6:30 and 7:30 then EUR was subject to travel higher to near 1.2500’s.

The answer to SOFR and risk free interest rates is to garner more control over exchange rates when a particular nation’s market is closed. This will further restrict currency price ranges and it will take far longer for an economic announcement to rightside.
The payoff comes to bankers as they assisted to realign and restrict interest rates to tiny ranges. Take GBP. Interest rates trade in barely 2 point ranges. The bottom is a 0.44 to 0.46 or a topside from 0.46 to struggle at 0.47 and 0.48. This situation is a GBP range compresion in the highest order and far different than pre 2008 days of old . Pre 2008 market movements would’ve seen a rightsize far quicker than today’s dead range control of exchange rates.
Break Points.

EUR/USD. Must break 1.2191 for lower and 1.2191 is up 31 pips since Sunday’s open. Below comes the 5 year average at 1.1966. The road below is replete with massive supports.

EUR/JPY must break falling 132.24 to travel higher.

GBP/JPY must break falling 148.98 to head higher otherwise both EUR/JPY and GBP/JPY represent a correction in a larger downtrend.

USD/JPY must break 108.52 or again, USD/JPY is in correction mode from oversold at Sunday’s open.

AUD/USD must break 0.7824 while NZD/USD is located at 0.7233.

GBP/USD 1.3733 awaits to head lower as GBP os in do or die mode.

 

Brian Twomey