In a week when markets mostly marked time waiting for this week’s Federal Reserve September meeting, the main news was the relentless rise in energy prices, even as inflation data for August in the US came slightly softer than expected, and Eurozone inflation was confirmed at a 10-year high.

The general tone in financial news is that of growing worries that inflationary pressures may not be wholly transitory, and that bottlenecks, shortages and price hikes are here to stay, fuelled by extraordinarily stimulative fiscal and monetary conditions. The biggest winners last week were again the currencies of commodity exporting countries: the Norwegian kroner, Russian ruble, and the Chilean peso.

A side event to the Fed meeting that warrants attention is the developments around the troubled Chinese property developer Evergrande. For now, the impact on the yuan has been minimal, though some of the Pacific currencies more exposed to Chinese trade have suffered.

Central banks take front and center this week. Of course, the main event will be the Federal Reserve meeting on Wednesday. However, the Bank of England on Thursday will also provide for volatility, as will the meetings of the Norwegian, Swedish, Swiss and Japanese central banks.

GBP

Yet another strong inflation report out of the UK, together with encouraging employment data, saw traders bring forward their expectations for Bank of England hikes. However, even after this adjustment there is no hike priced in until the summer of 2022, and we wonder if the relentless upward pressure on prices will bring forward expectations for hikes into Q1 next year.

The Bank of England meeting on Thursday will be key in this regard. Market expectations about the meeting are too relaxed, and we would not be surprised to see more dissenters join Michael Saunders in calling for an immediate reduction in QE purchases, which would provide solid support for the pound.

EUR

Skyrocketing gas prices in Europe and the resulting hike in energy costs for consumers and producers throughout the Eurozone seem to have blindsided the ECB. Signs are emerging that some within the central bank are uneasy with its forecasts of below target inflation as far as the eye can see, and that market expectations of no hikes until at least 2025 may be too dovish.

At any rate, we expect these disagreements and inflation data to remain the main drivers of euro trading for the foreseeable future. Market views of future ECB policy are so dovish that the risk is clearly toward an earlier than expected tightening of monetary policy, which would be positive for the common currency. Meanwhile, the German federal election on Sunday will be closely monitored by investors, although we think that the actual impact on the euro will be rather limited.

USD

Inflation in August remained very high, though the headline and core numbers were slightly softer than expected. There were signs that the spikes in inflation are spreading from pandemic-related shortages such as used cars to more persistent areas such as housing. Regardless, markets did not seem reassured by the inflation numbers and sent Treasury yields higher for the week.

The above provides an interesting backdrop for the September FOMC meeting on Wednesday. We think the doves will carry the day for now, and no taper will be announced at this meeting. However, the hawks are likely to express their rising dissent in the “dot plot” where each member records their expectations for rates in successive years. We are likely to see quite a few outliers expecting hikes much sooner than the market, though the dollar’s reaction will be anyone’s guess.