Big Picture: Inflation fell broadly around the world in February. We expect the disinflationary trends to continue in the near term, but inflation should slowly move up again by the end of the year, reflecting the global economic recovery. On a global level, low inflation is not a bad thing as it gives central bankers the possibility to set monetary policy that is supportive to economic growth. In the US, we think inflation will move towards the Fed’s goal next year. For the eurozone and Japan, the situation is more worrying as core inflation is particularly low. As long as the recovery continues and currencies fall versus the dollar, deflation should be a avoided.
Rates: The Fed stayed on the path of gradually tapering its asset purchases. More surprisingly, the FOMC raised its likely path of interest rate hikes, while Fed Chair Yellen said that the period during which the Fed would maintain the federal funds rate at its current level after the asset purchase progamme ends would probably be ‘something of the order of around six months’, implying that the first rate hike could be in the spring of 2015. We continue to expect rates to end 2015 higher than the Fed and markets are currently signalling.
FX: The more hawkish than expected FOMC provided strong support to the US dollar across the board. Meanwhile, emerging market currencies were mostly under pressure last week as financial markets priced in a higher profile for US short term interest rates next year. We remain positive on the US dollar versus major currencies and most emerging market currencies, because of our above consensus outlook for US economic growth and Fed interest rate hikes. Therefore, we see a higher USD/JPY and a lower EUR/USD.