Major central banks have lost control of inflation and are increasingly front loading their rate hikes to prevent inflation expectations from de-anchoring. The RBA's 50bp move on Tuesday is the latest example, and likely won't be the last.
Once policymakers acknowledge inflation has become the number one issue in their economy, as the RBA has finally done, there should be further front-loaded tightening.
For me, this means the ECB in July might opt for 50bp as well, going straight to zero interest rates in one go, with the market then likely pricing in another 50bp in September.
The noise on Monday around a bond purchase program to backstop peripheral spreads should be seen as the doves trying to get something in return for agreeing with the hawks to the increasingly inevitable rate hikes.
In this situation, the US CPI release this Friday will be hugely important as it could determine whether the Fed has to reconsider 75bp steps, or at least continued 50bp moves beyond September. If so, the dollar rebound of the last 24 hours could consolidate -- if not extend. Should Friday's US CPI print be seen as benign, the dollar might be in for a period of weakness as hikes are front-loaded elsewhere.
- UBS Strategy
Comments