20 Jan 2014
Flash: EUR/USD capped for now? - Societe Generale
FXstreet.com (Barcelona) - Kit Juckes, Global Head of Currency Strategy at Societe Generale feels that inflation divergence could cap EUR/USD for the near term.
Key Quotes
"If globalisation, technology and automation continue to act as anchors for wage growth, we shouldn't expect upside surprises in inflation any time soon. the divergence between US CPI and homeowners' equivalent rent highlights the risk of US/European divergence. Homeowners' equivalent rent accounts for 24% of overall US CPI and as the housing market recovers, it has de-coupled from core CPI."
"That means that while the Eurozone (where some of the scariest employment/wage trends can be seen) is still at risk of deflation, the same is not true of the US. We are going to see inflation diverge and while that may not cause bond markets to de-couple, it will see Bunds outperform Treasuries."
"That in turn will cap EUR/USD for now, before eventually triggering a fall. And if the higher rent component of US CPI does send inflation up, or if lower unemployment eventually sends US wage growth up, we will see pressure for earlier Fed tightening send the dollar up significantly across the board."
Key Quotes
"If globalisation, technology and automation continue to act as anchors for wage growth, we shouldn't expect upside surprises in inflation any time soon. the divergence between US CPI and homeowners' equivalent rent highlights the risk of US/European divergence. Homeowners' equivalent rent accounts for 24% of overall US CPI and as the housing market recovers, it has de-coupled from core CPI."
"That means that while the Eurozone (where some of the scariest employment/wage trends can be seen) is still at risk of deflation, the same is not true of the US. We are going to see inflation diverge and while that may not cause bond markets to de-couple, it will see Bunds outperform Treasuries."
"That in turn will cap EUR/USD for now, before eventually triggering a fall. And if the higher rent component of US CPI does send inflation up, or if lower unemployment eventually sends US wage growth up, we will see pressure for earlier Fed tightening send the dollar up significantly across the board."