Yesterday seemed to be all about central bankers turning a blind eye to inflation which has yet to fully arrive as a means by which perhaps easier policy can be sustained for longer. Japan was the first to do it last month, with their latest policy ruses containing a ‘inflation overshooting commitment’, which had barely any impact on markets in Japan because investors have become immune to pledges from the BoJ to restore sustained inflation. So this belief that central bankers can engineer above target inflation, in part because of the underperformance of previous years, has to be credible. For Japan, it isn’t. The Eurozone would probably be laughed off stage at this point for making such a pledge. As for the US, today’s data is likely to show the headline rate rising from 1.2% to 1.5% on a YoY basis, which is a decent leap. But if the price rises are largely coming in food and energy, then it’s not the best kind of inflation for consumers, especially those on lower incomes who spend a greater proportion on such items.
For currencies, it depend on whether such beliefs are going to materially affect monetary policy. For Japan, we know they’ve thrown pretty much everything at it with little effect, so it can be largely dismissed. In Europe, there is a growing expectation that the ECB will deliver further stimulus measures in December. In the UK, the fall in the pound is set to push headline inflation higher, so this could push out the next easing from the BoE, which on the face of their view of the economy is still on the agenda. For the US, is matters more for what the Fed believes will be delivered next year. Recall that the Fed had nearly 4 rate hikes projected for 2016 back at the end of last year. In practise, only one is likely to be seen. Overall, this latest rhetoric has sown some seeds of doubt over a December rate increase from the Fed, hence the pull back in the dollar. Overnight, we’ve see the kiwi push back to the .72 level on the back of better than expected inflation data. The focus is on UK inflation data today at 08:30 GMT, with US numbers thereafter.