Employment and Inflation Running the Show
When analysts are analysing the market they evaluate statistics, correlations and economic links in order to determine a price movement, possible performance and risk. There are different economic chains known in the financial trading market where one event can trigger another and another after that. There are so many events and statistics which are historically looked at in order to determine price movement, which today have slightly faded into the background. Today, the market is less looking at politics, Gross Domestic Products, fiscal policies etc. and have focussed their attention solely on employment and inflation. As part of this article we will look at why this has taken on such a big importance over the past two months.
Inflation is the percentage in which prices within an economy are increasing, such as gas, petrol, pharmaceuticals, cars, food and alcohol. Inflation is actually split up into three possible scenarios, inflation where prices are increasing, deflation which is when prices are declining, and stagnation where we are seeing neither of the two. Ideally economies wish to see an inflation rate of 1.75% to 2.5% as a maximum as this indicates healthy economic growth. As a healthy economy grows, businesses and consumers spend more money on goods and services. In the growth stage of an economic cycle, demand typically outstrips the supply of goods, and producers can raise their prices; as a result, the rate of inflation increases. However, high inflation, also known as hyperinflation, can be damaging in the long-run hence why most regulators try to cap inflation at 2.5%. High inflation can cause significant issues in the longer term such as risking the currency losing its purchasing power, promoting unhealthy levels of investment and increasing the cost of borrowing. Simultaneously, deflation is just as negative as it can result in a massive drop in business activity as individuals fear their assets devaluing.
Currently, we are seeing high levels of inflation in the US and the European Union. For more than two months now, the investment community has been awaiting action by the US Federal Reserve and now, the European Central Bank. Inflation in the two regions has exceeded the target level of 2.0% and is stably above it. Such a high indicator may strain the US Dollar from appreciating. A possible solution to stabilize economic processes would be to reduce the asset repurchasing program, which regulator officials are more often speaking about in interviews. However, in his latest statement, the head of the US Fed, Jerome Powell, made it clear that the main indicator is employment, the levels of which are far from the target. Powell also repeatedly emphasized the levels of inflation, in case of acceleration of which the department could begin to change monetary policy.
The key day for the Euro and major pairs will be today where the European Central Bank is due to announce its Monetary Policy Statements, and June 10th when US consumer price data for May is released. Analysts expect the growth rate to accelerate from 3.0% to 3.4% YoY, and to decrease from 0.9% to 0.4% MoM. The situation on the labor market is stabilizing at least a little, but at an extremely slow pace according to some.
The issue which the two Central Banks are experiencing is that inflation needs to be kept under control, but at the same time an alteration to the monetary policy may further harm the employment sector. The unemployment rate in the US is still 2% higher than the beginning of 2020 and almost 1% higher in the EU. Hence why employment is proving to be just as important as the inflation level. Over the next month the market will be keeping a close eye on both the inflation rate and employment to see how this may further push the Central Banks to react. Any sign of this, or hawkish comments from the Bank’s President or Monetary Policy Committee can significantly affect the value of the regional currency.