The Week Ahead – Inflation From Supply Shortages Could Well Be Transitory

SPX 500 rises as inflation seems transitory

The S&P 500 broke to a new high as investors make sense of hotter-than-expected inflation.

A closer look at consumer prices reveals that the surge comes mainly from commodities and travel. This reopening effect is due to supply shortages. Price pressure could ease once companies’ output catches up with demand.

Markets also find reassurance from a volatile job market, a reminder that the real economy does not go into a V-shaped recovery but the long way round.

The breakout above 4240 could extend the rally to 4400. In case of a pullback, the area between the rising trendline and 4060 may offer support.

EURUSD remains on recovery trajectory

The euro holds at a 3-1/2-month high as the latest ECB meeting came in line with the market’s expectations.

The central bank gave no hint at reducing its massive stimulus package but stressed that inflation could remain below the 2% target in the foreseeable future. Consumer price indices would only be meaningful when compared like for like, by excluding noises from the start of the crisis last year.

As a result, post-summer data would be more suitable as a policy lever.

In the meantime, the pair continues to recover along the 20-day moving average. 1.2350 may see selling interest while 1.9870 is the immediate support.

USDCHF drops as markets play cautiously

The Swiss franc recouped most losses from earlier this year as risk appetite took a hit across markets.

The franc had been sold off on an improved economic outlook notably with the reopening of its European neighbors.

However, rising Covid cases and new restrictions in Asia mean the world is not out of the woods yet. The SNB is caught by rising demand for its safe-haven currency. Along with low inflation and growth at home policymakers have all the incentive to weaken the franc.

The pair is sliding to the key support at 0.8870. A rebound will need to close above 0.9090 to be meaningful.

USDCAD finds respite from patient BoC

The Canadian dollar stays muted after the BoC’s mild statement in their latest policy meeting.

The central bank has put itself in the US Fed’s shoes by saying that the pace of the QE will depend on the strength and durability of the recovery. A mixed bag of labor data lately suggests the path to a normalized economy could be choppier than what the bulls may expect.

Inflation-wise, high reading may suffer from base-year effects due to lockdowns last year, thus mitigating its significance. The pair is hovering above the psychological level of 1.2000. A fall could trigger a new round of sell-off. 1.2350 is the closest resistance.