Central Bankers See Inflation Rising

Daily Analysis - 31/08/2015

Comments from Policymakers at Jackson Hole Heighten Expectations for Policy Normalization

According to the latest forum of global central bankers, inflation is set to rebound in the coming months after many developed economies saw consumer and producer prices tumble to the brink of deflationary territory with disinflation remaining a chief concern amongst policymakers.

Jackson Hole Symposium Concludes

The two day annual Central Banker's symposium at Jackson Hole concluded on Saturday with Central Bank Governors from across the world participating. Many were of the view that inflation could start to rise sooner than later, providing justification for tightening monetary policy accordingly. The theme for this year’s Jackson Hole Symposium was titled “Inflation and Market Dynamics.” The Federal Reserve's Vice Chairman Stanley Fischer noted that given inflation was steady there was a good reason to expect inflation to rise as the downward pressure on inflation starts to dissipate. Fischer’s comments also sparked some momentum in the dollar after stating that inflation would not need to rise back towards the long-term target before more hawkish policy measures were initiated. Besides Fischer, the ECB's Vice President Vitor Constancio and Governor Mark Carney from the Bank of England echoed the same views. However, Fischer refused to elaborate further on the Fed's September 17th FOMC meeting.

Crude Oil surges to 2-week high

Last week's trading session saw WTI crude oil prices rally by over 12.2% to close the week at $45.22 a barrel after hitting lows of $37.75 earlier. The one week gain in crude oil comes after a prolonged 9-week decline which saw WTI crude oil fall from the recent high of $59.90. Earlier in the week, the EIA released the weekly oil inventory report which showed a substantial decline in US oil stockpiles. While prices stayed flat after the release, starting Thursday, crude oil posted a spectacular two day rally. But from a technical perspective, expectations are for prices to decline as WTI trades near a major pivot level of $45.05, a support level that was tested on two previous occasions in January and March this year. If the resistance at $45.05 holds, WTI could decline towards the next lower support at $41.85 as a bottom seems to have been established for the near term. In the unlikely event that crude oil breaks above the resistance at $45.05, a further rally in prices is entirely feasible.

German Retail sales & Eurozone CPI

The economic calendar today is quiet with no major news releases expected. Financial markets in the United Kingdom are closed on account of the Summer Bank Holiday and in the European trading session, the German retail sales and the Eurozone Flash CPI data are the only two major news releases worth noting. German retail sales declined by -2.3% last month after rising to yearly highs of 2.9% in March of this year. The flash CPI estimates for the Eurozone is expected to show inflation staying muted at 0.2% on the headline and at 1.0% for the core figure. Eurozone core inflation has been steady after staying flat at 0.6% until April this year before settling between 0.9% and 0.8% since April. The ECBs bid to stoke inflation and revive growth has largely had limited impact since the inception of asset purchases. The flash CPI estimates comes ahead of the ECB’s monetary policy meeting later in the week.

USDJPY Technical Levels

USDJPY has managed to recover off the lows near 116.26 from last Monday and is currently trading above the 121 handle just short of the 61.8% Fibonacci retracement from the highs of 125.278 and 116.157. Failure to rise above 122 could potentially see the USDJPY decline back towards 120, where the 38.2% Fibonacci level comes in at 119.641. USDJPY is not expected to trade sideways ahead of a new trading month starting tomorrow which also marks important monthly economic data being released. US equity markets are following a similar trend with the Dow Jones Index retracing its losses from last Monday. How prices react to the support levels will be important as it still poses potential downside risks for the USDJPY as well as the Dow Jones Index.