#OPINIONLEADER#

ByLCMS Traders FX Analysis Team

 MAY 17, 2021

(1) The U.S. Bureau of Labor Statistics reported a spike in inflation in April. Headline inflation rose by 0.8% as opposed to a slowdown to 0.2% from March. Omitting food and energy, core inflation rose by 0.9%, thrice the rate in March. The biggest driver behind the spike in April was used cars and truck prices, which accounted for more than one-third of the overall increase in inflation. Furthermore, supply-chain woes imply that supply is not meeting demand, thus sending prices higher. As a result, USD strengthened across the board.

(2) Despite the sharp rise in prices in the U.S. that is becoming a worrisome matter to many, members of the Federal Reserve continue to downplay it during their speeches last week, saying that inflation pressures will be transitory. One of the reasons is labor slack. As long as the labor market is not strong, it will be hard for inflation to rise persistently. Another reason is due to base effect. Twelve-month inflation is subjected to big changes if major event(s) took place a year ago, leading to the “base effects” that impacted inflation. Last year this time, inflation plunged as the economy went into locked down due to the pandemic. Now that the economy is recovering, inflation will face a temporary spike.

(3) Bank of England (BoE) Governor Bailey said in his speech that with the growing level of optimism, if the central bank’s forecasts were to hold, the UK economy will recover back to the pre-COVID levels by the end of this year. Governor Bailey also highlighted that higher inflation is unlikely going to persist.

(4) During his speech last week, Bank of Canada (BoC) Governor Macklem highlighted that inflation is Canada is expected to hit the 3% level in the near future. He also highlighted the concern of a stronger Canadian dollar, saying that it will become an issue for export forecasts.