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Fed officials continue to repeat the word transient with respect to inflation pressures. This has had a fair amount of success in depressing fears about price pressures and reeling back moves in both market rates and the USD. That said, the re-inflation/inflation debate is unlikely to fade meaning that pockets of USD strength are likely in the coming months, according to Jane Foley Senior FX Strategist, Head of FX Strategy at Rabobank.

Fed officials are sticking to the script

“Almost irrespective of whether or not the Fed is correct in its assessment that this year’s inevitable spikes in inflation will pass, there are sufficient doubts over whether all price pressures will be fleeting to keep the market anxious. This suggests scope for choppy trading which implies that there are likely to be pockets of support for the USD in the coming months”    

“In the bond market, a moderate move higher in real yields would generally be taken as a signal that the market is expecting a decent economic recovery, meaning that expectations about an increase demand will be outstripping those related to higher inflation. This scenario should therefore be broadly welcomed.”

“Whichever side of the US inflation debate proves correct it is difficult to deny that the arguments are likely to prevail for some time. This suggests scope for choppy trading conditions in the weeks ahead and, if US real rates rise again, the possibility of another break below EUR/USD 1.20.”

 

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