The Formidable Specter of Inflation The information presented on this publication is for informational purposes only and does not constitute investment advice, a sales offer, or a solicitation to buy, and should not be used as a basis or considered as an incentive to engage in any investment. The macro point The daunting specter of inflationThe macro pointInflation is uncomfortably high in developed countries. In Canada, inflation, measured by the consumer price index (CPI), accelerated to 4.1% year-on-year in August from 3.7% in July. This is the largest increase since March 2003. The rise in prices is partly due to temporary factors related to the reopening of the economy after the lockdown phase (example: increase in airfare prices). However, other factors could lead to a lasting rise in inflation, such as wage growth. This phenomenon is already being observed in the United States and the United Kingdom. The labor shortage in these two countries has caused very exacerbated wage pressures. Across the Channel, average wages, including bonuses, continued to rise by 8.3% in July from 8.2% in June according to data published last week. In the United States, wages are also skyrocketing. In some American states, McDonald's is offering a minimum wage of $18 per hour compared to a federal minimum wage of $7.25 per hour.For now, central bankers continue to affirm that inflationary pressures are temporary and that there is no need to fear a lasting price-wage spiral. However, this risk should be monitored in the short term. It could also influence the approach adopted by the US central bank (Fed) in managing tapering (reduction in asset purchases, in French). If this risk were to materialize, central banks would have no choice but to increase key rates to avoid persistently high inflation.In the eurozone, the risk of a price-wage spiral is close to zero. The latest statistics published by Eurostat last week show that wages at the bloc level have decreased for the first time since 2011. This should reassure those who fear a surge in inflation. In terms of monetary policy, the absence of a price-wage spiral leaves the ECB more room to maintain its ultra-accommodative monetary policy for as long as it deems necessary. During a speech to students at the HEC business school, Christine Lagarde, President of the ECB, expressed her optimism about the economic dynamics in the eurozone. "The recovery in the eurozone is faster than expected six months ago, mainly due to a rapid vaccination campaign," she reminded.Finally, the latest American indicators that were published were generally positive. Retail sales in August increased by 0.7% month-on-month and by 2% if automobiles and gas are excluded from the calculation. The most significant increases were observed in online sales, supplies sales, and goods. Conversely, automobile sales continue to decline due to prices considered too high. It seems, therefore, that despite the resurgence of the pandemic across the Atlantic and concerns about inflation, the American consumer is generally doing well. The trend in the labor market is also solid. Weekly jobless claims for the week ending September 11 slightly increased (+2000). But the long-term trend is still downward. Technical point In the foreign exchange market, the euro ended down on a weekly basis against its main counterparts, except for the Swiss franc (+0.8%). The rise of the euro against the Swiss currency is partly explained by a likely intensification of interventions by the Swiss National Bank (SNB) in the foreign exchange market. A little over a week ago, a SNB representative indicated that the CHF is overvalued against the euro. From a technical analysis perspective, the EUR/CHF pair has now entered an upward channel that could propel it towards 1.11, in the short term. The EUR/GBP pair is still stagnant (-0.10% on a weekly basis). It remains in a narrow channel between 0.85 and 0.86. It is hard to see what could change the situation immediately. Finally, the EUR/USD continues its depreciation with a decline of -0.7% over the past week. The next technical level to watch is the support area at 1.1661. It is likely that the EUR/USD will end the year close to 1.15. This is the target of many leading investment banks. The supports and resistances shown below respectively indicate the lows and highs within which the rates should evolve during the week.SUPPORTSWEEKLYRESISTANCESWEEKLYS2S1R1R2EUR/USD1.16001.16611.18651.1920EUR/GBP0.84010.84640.85960.8651EUR/CHF1.07211.08171.10001.1110EUR/CAD1.45651.47671.51721.5374EUR/JPY127.10127.80130.06131.10For personalized advice on trends and currency hedging, contact our trading room: Announcements to follow The market driver this week will be the meeting of the American central bank scheduled for this Wednesday. The level of inflation in the United States in recent months is problematic according to several members of the Monetary Policy Committee (FOMC). But there is no rush to reduce the support that the central bank provides to the economy and financial markets. The consensus among economists is for a start of tapering (mentioned above) in November. This week's meeting should update economic forecasts. Particular attention will be paid to inflation projections to determine if the central bank still considers inflationary pressures to be temporary. Additionally, Fed Chair Jerome Powell might give market participants some cues on the exact timing of tapering and its composition. Other central bank meetings are expected to result in unchanged monetary policy (Swiss National Bank and Bank of England). Two political deadlines are planned: early legislative elections in Canada today and federal elections in Germany on Sunday, September 26. But the impact on the foreign exchange market should be marginal. Below you will find publications and events that should have a major impact on the evolution of exchange rates.DAYTIMECOUNTRYINDICATORWHAT TO EXPECT?22/0920:00Central bank meetingUpdate of macroeconomic forecasts and monetary policy decision.20:30Press conference by J. PowellIndications regarding tapering schedule. 23/0909:30Central bank meetingUnchanged monetary policy.13:00Central bank meetingUnchanged monetary policy.24/0910:00IFO Business Climate Index (September)Expected increase to 100.4 from 99.4 previously.Did you enjoy this content? Share it!