Markets May Be Too Complacent About Inflation

Central Bank

Summary:

Inflation has been the big economic concern for several years now, across much of the globe (though not quite all, as we’ll see in a moment). But the tentative, broad view has been that prices are now sort-of, kind-of under control. Certainly enough so that markets largely expect central bank interest rates to keep falling, albeit slowly, over the next year or so.

In the US, President Donald Trump has even gone so far as to put a great deal of pressure on Federal Reserve boss Jerome Powell to cut interest rates, pelting him with insults and even threatening to fire him (which may not even be possible).

The problem, however, is that prices don’t actually seem to be cooperating with the hopes and dreams of politicians and central bankers. In the UK, we’ve seen inflation come in “hotter” than hoped on a regular basis, with this week’s data no exception.

And over in the US, even without much obvious impact from tariffs as yet, inflation is nowhere near “beaten,” as my colleague John Authers pointed out earlier this week.

So progress toward a more “normal” world has been a lot slower than was expected a year ago. And that does rather raise a question. In yesterday’s piece, I pointed out that it’s actually quite tricky for the Bank of England to consider cutting rates aggressively when inflation is barely below Bank rate.

So what if inflation actually stops falling? What if it starts to perk up again?

It’s not out of the question. As Vincent Deluard of global financial services company StoneX Group points out, Powell could be forgiven for leaving US interest rates on hold at the next Fed meeting.

Although US core CPI is rising at an annual rate of 2.7% (as per the June data released last week), US services inflation remains stubbornly high, and there are signs that tariffs may be adding to the cost of durable consumer goods, such as washing machines.

On this latter point, UBS economist Paul Donovan highlights that it might be easier for companies to push the rising cost of infrequently purchased goods onto consumers. It’s one thing to notice the price of milk or petrol going up, but if you last replaced your telly or washing machine five or more years ago, you’ll probably be less sensitive to price changes.

Moreover, as Bloomberg columnist Simon White points out, various leading indicators “point to re-acceleration in inflation in the second half of the year, almost regardless of where tariffs settle.” (Those of you with access to Bloomberg terminals can read his work by subscribing to the MacroScope column, which I’d highly recommend.)

The China Surprise

Pricing pressures stem from factors including rising freight costs, rising industrial metals prices, and also food prices. But there’s another big potential inflationary force, coming from a surprising direction — China.

I say surprising because China has a long history of exporting deflation in the form of cheap goods. On top of that, China is among the few economies that are internally battling deflation.

Indeed, the Chinese government is very keen to put an end to deflation, as this fascinating piece by my Bloomberg Opinion colleague Shuli Ren explains. (One reason this piece in particular caught my eye is because “vicious” private sector competition is not necessarily something one associates with a communist economy.)

This isn’t a simple battle to win. However, as White notes, the pace of money growth in China now does look as though it’s accelerating. China is hugely significant in terms of the global money supply, so this is worth watching. Indeed, the country is so large that “money in China is the single most important driver of global liquidity,” White says.

Why does this matter? Without wanting to get too monetarist about it all, more money should mean more borrowing, more spending, more economic activity and more growth, and in turn, more inflation. Given China’s sheer scale, that means more inflation globally.

Adding it all up, there’s a risk that we’re all being a bit overconfident about the idea that inflation is now behind us as a major issue.

What could put a serious dent in this thesis? A recession is the most obvious outcome that might stifle inflationary pressure. But even then, any slowdown might take on more stagflationary than deflationary characteristics.

Also, despite vast government debts, leaders are under pressure to keep spending — or to at least duck hard choices — in order to appease irritated electorates. Japan is merely the latest economy whose election this weekend has been dominated by anger over the cost of living.

As far as what it all means for your money, all I can suggest is that you stay vigilant, be prepared for more potential bond-market drama, and hold at least some portion of your portfolio in “real” assets, which have a tendency to hold their value in inflationary times. My colleague Merryn had some thoughts on this in her newsletter last week.

Source: Bloomberg Europe

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Adam

Cryptocurrency

The total market value of cryptoassets surged past $4 trillion for the first time, driven by a rally in altcoins and momentum from a sweeping US legislative push to regulate the sector.

The milestone followed the passage of the first-ever federal legislation for stablecoins, a key accomplishment during what lawmakers have dubbed “Crypto Week.” The bill, backed by Republicans and championed by President Donald Trump, introduces federal or state oversight of dollar-linked stablecoin, aiming to legitimize a $265 billion market that Citigroup Inc. analysts project could grow to $3.7 trillion by 2030.

Altcoins — a catch-all term for tokens besides Bitcoin — led the latest leg of the rally, with Ether jumping 22% over the past five days. Bitcoin, the industry’s benchmark asset, hit a record $123,205 earlier this week. Uniswap surged as much as 24% on Friday, while Solana gained 6.5% at one point.

Thursday also saw the House pass a broader crypto market structure bill, which now awaits Senate consideration.

Investors have continued to flood into US-listed crypto ETFs. Bitcoin funds have attracted $5.5 billion in inflows so far in July, while Ether ETFs brought in $2.9 billion.

Source: Bloomberg

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Michelle

Forex

Economic

Federal Reserve Governor Christopher Waller still supports interest rate cuts at the end of July, despite growing concerns over a possible tariff-induced inflation.

At a meeting of the Money Marketeers of New York University, he remarked, “I believe it makes sense to cut the FOMC’s policy rate by 25 basis points two weeks from now.”

Waller believes tariff-induced inflation is only temporary

According to Waller, the economic and labor market data show that the economy is still growing, though more slowly.

He argued, however, that unemployment risks have risen, warranting a rate reduction. The Fed Reserve Governor believes a weaker job market is “greater and sufficient” to cut interest rates, adding that policymakers should not wait for a deeper decline in the labor market.

He added that they can choose to disregard the short-term impact of tariffs and instead prioritize broader economic concerns.

In his view, more attention should be directed toward underlying inflation, which is dangerously close to the Fed’s 2% goal, rather than temporary tariff-related price pressures. Even before Thursday, Waller had previously insisted that tariff effects would only be temporary.

The Feds are set to meet from July 29 to July 30 in Washington to discuss policies and possible rate cuts. So far, among Fed officials, Waller and Vice Chair for Supervision Michelle Bowman are the only two to express a willingness to consider rate reductions as early as this month.

Other officials like Governor Adriana Kugler and New York Fed President John Williams, however, over tariff fears, have suggested that policymakers should wait longer before slashing rates.

Investors anticipate that rate cuts will be implemented in September

US June’s data showed a less-than-expected rise in core inflation for the fifth consecutive month, even as Trump’s April tariff announcements augmented the cost of certain items. Waller predicts that the economy will “remain soft” for the remainder of 2025 after only growing at a slow 1% rate in the first six months.

Nevertheless, most investors believe the central bank will maintain interest rates as they are after the meeting this month. However, they expect the Feds to reduce rates later in September.

Waller, when asked about possible September rate cuts, said that any additional cuts beyond this month would entirely rely on incoming economic data. He said he prefers they start now, not waiting until the labor market plunges.

Waller is still being considered to be one of the possible successors to Fed Chair Jerome Powell, when his term ends. However, Waller stated he has not discussed the position with any administration officials.

President Donald Trump has been at odds with Powell for months now. He has consistently asked Powell to lower interest rates, but those calls have been dismissed. Recently, the Fed chair also came under fire over the renovation at the central bank’s headquarters. Some Republicans have accused Powell of excessive spending on the project, urging more investigations into the matter.

When asked to comment on the renovation issue, Waller noted that in his experience, construction projects often face similar challenges, emphasizing that while he wasn’t defending the situation, it wasn’t uncommon. He added that inflation had turned out to be much higher than anticipated when bids were made in 2017, stating that it’s clearly a factor.

Source: CryptoSlate

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Adam

Forex

Market Overview

During Friday’s Asian session, the US Dollar Index (DXY) pulled back to around $98.50, giving up recent gains. The decline followed growing market expectations of a more accommodative Federal Reserve and easing global risk concerns, both of which weighed on dollar demand.

Fed Comments Hint at Sooner Rate Cuts

The move was driven by remarks from several Fed officials suggesting that policy easing could come sooner than previously anticipated. Mary Daly of the San Francisco Fed said two rate cuts this year would be “reasonable” and cautioned against delaying action, citing a higher potential neutral rate—possibly near 3%.

Fed Governor Christopher Waller supported a possible 25 basis point cut at the July meeting, citing softening growth and contained inflation. Adriana Kugler also suggested holding rates steady for now, noting stable employment and moderating inflation risks.

Strong Data Offsets Dovish Tone

Still, stronger-than-expected US data cooled immediate expectations for a rate cut. June retail sales rose 0.6% month-over-month, reversing May’s 0.9% drop, while jobless claims fell to 221,000, below forecasts. These figures suggest the Fed may adopt a cautious approach despite dovish commentary.

Investors are now watching Friday’s University of Michigan Consumer Sentiment report, as well as Building Permits and Housing Starts, for further signs on growth and Fed direction.

US Dollar Index (DXY) – Technical Analysis

Dollar Index Price Chart

The U.S. Dollar Index (DXY) is trading near $98.45, holding just above the 50-EMA at $98.36 after failing to clear resistance at $98.75. While the index remains above the 200-EMA ($97.95), upward momentum is slowing as price action struggles under a descending trendline.

A clean break above $98.75 could open the path to $99.02 and $99.26. However, failure to hold $98.39 may lead to a decline toward $98.15 and potentially $97.82.

GBP/USD Technical Analysis

GBP/USD is attempting a bullish breakout above $1.3456, supported by an ascending trendline and a base near $1.3417. Price is testing the 50-EMA at $1.3434, and holding above this level could expose $1.3486 and $1.3517.

A rejection here, however, risks a drop toward $1.3396 and $1.3341. The pair remains well below the 200-EMA at $1.3524, suggesting that any upside may face resistance.

Traders are watching for sustained price action above the short-term trendline and key resistance to confirm a shift in momentum. (edited)

EUR/USD Technical Forecast

EUR/USD is trading near $1.1631, struggling below the 50-EMA resistance at $1.1632, with downside pressure intact inside a descending channel. The pair bounced off support at $1.1580, but buyers are yet to regain control.

A break above $1.1658 could challenge $1.1692 and $1.1720, while failure to clear resistance may keep the pair vulnerable to $1.1612 and $1.1556.

Price remains below the 200-EMA at $1.1657, limiting upside potential for now. Traders will be watching for a decisive close above the channel to signal reversal.

Source: fxempire

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Glendon

Economic

Commodity

The gold market is trading higher ahead of the weekend after the latest data showed consumer sentiment in the U.S. improving more than expected, while near-term inflation expectations pulled back.

The University of Michigan announced on Friday that the preliminary reading of its Consumer Sentiment survey for July was 61.8, which was higher than June’s final reading of 60.7. The data was better than expectations, as the consensus forecast of economists called for a 61.5 reading.

“Consumer sentiment was little changed from June, inching up about one index point,” said Surveys of Consumers Director Joanne Hsu. “While sentiment reached its highest value in five months, it remains a substantial 16% below December 2024 and is well below its historical average.”

The gold market is trading near the upper edge of its daily range following the 10 am EDT data release, with spot gold last trading at $3,356.84 per ounce for a gain of 0.53% on the day.

The components of the July index were mixed, with a sharp rise in short-run expected business conditions and a significant drop in one-year inflation expectations, but longer-run inflation fears persisted.

“Short-run business conditions improved about 8%, whereas expected personal finances fell back about 4%,” Hsu noted. “Consumers are unlikely to regain their confidence in the economy unless they feel assured that inflation is unlikely to worsen, for example if trade policy stabilizes for the foreseeable future. At this time, the interviews reveal little evidence that other policy developments, including the recent passage of the tax and spending bill, moved the needle much on consumer sentiment.”

Year-ahead inflation expectations also fell for a second straight month, dropping from 5.0% in June to 4.4% this month. “Long-run inflation expectations receded for the third consecutive month, falling back from 4.0% in June to 3.6% in July,” she said. “Both readings are the lowest since February 2025 but remain above December 2024, indicating that consumers still perceive substantial risk that inflation will increase in the future.”

Source: Kitco

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Adam

Commodity

Market Overview

Oil markets remained volatile on Friday as WTI crude held onto recent gains near $ 67.60 per barrel, buoyed by renewed supply risks and a brighter demand outlook. Output disruptions of up to 150,000 barrels per day in northern Iraq, alongside broader geopolitical tensions, stoked market uncertainty.

On the demand side, resilient U.S. economic indicators and stronger-than-expected Chinese GDP data helped ease growth concerns. Meanwhile, a sharp drop in U.S. crude inventories, despite rising production, underscored solid consumption.

However, prices still faced weekly losses of over 1% as easing sanctions concerns tempered bullish momentum, highlighting the market’s sensitivity to shifting global risk dynamics.

Natural Gas Price Forecast

Natural Gas (NG) Price Chart

Natural gas prices are holding firm at $3.578, staying within a rising parallel channel after rebounding from the $3.19 low. The 50-EMA at $3.476 now acts as dynamic support, while the 200-EMA at $3.620 remains a key resistance zone.

A clean breakout above $3.600 could open the door to $3.622 and $3.678, with $3.752 as the next upside target. On the downside, a break below $3.510 may trigger a correction toward $3.419 and $3.292.

As long as the price stays inside the ascending channel and above the 50-EMA, the bias remains bullish. Traders should watch for a breakout or rejection near the $3.600 level to determine the next directional move.

WTI Oil Price Forecast

WTI Price Chart

WTI crude oil is attempting a bullish breakout above $67.88 after bouncing from a rising trendline near $65.56. Price now trades above both the 50-day EMA ($67.17) and 200-day EMA ($66.78), signaling strengthening short-term momentum.

Immediate resistance sits at the 23.6% Fibonacci level ($67.11), followed by $69.00 and $70.56. A sustained move above $69.00 would expose $72.11 as the next upside target. On the downside, support is seen at $67.12 and $65.56. A drop below $65.56 could open the door toward $64.02.

Overall structure suggests cautious bullishness, but momentum hinges on holding above $67.12 and breaking through $69.00.

Brent Oil Price Forecast

Brent Price Chart

Brent crude is trading near $69.81, showing signs of strength after rebounding off the $69.00 support level. The price is moving within an ascending channel and remains above the 200-EMA ($68.67), with the 50-EMA ($69.08) acting as dynamic resistance.

A clean break above $70.31 could open the door to $71.50 and possibly $72.83. On the downside, support is firm at $69.00, followed by $67.66 and $66.88. As long as the price stays within the rising channel and holds above key EMAs, the short-term structure favors cautious upside potential.

Traders will be watching for a decisive close above $70.31 to confirm renewed bullish momentum.

Source: fxempire

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Adam

Economic

The Japanese yen is showing little movement on Friday. In the North American session, USD/JPY is trading at 148.69, up 0.06% on the day. On the data calendar, Japan's inflation rate eased in June. It's a light day in the US, highlighted by UoM consumer sentiment and inflation expectations.

Japan's core CPI eases to 3.3%

Inflation in Japan fell in June as expected and the yen is showing little movement today. Headline CPI dropped to 3.3% y/y from 3.5% in May, matching the consensus. This was the lowest level since Nov. 2024, as prices for electricity and gasoline rose more slowly in June. Food prices were up 7.2%, the most since March, as rice prices soared 100%. Monthly, CPI eased to 0.1%, down from 0.3% in May. Core inflation, which excludes fresh food but includes energy, fell to 3.3% from 3.7%, in line with the consensus and the lowest pace since March.

The inflation numbers come just before an election for Japan's Upper House of Parliament on Sunday. The ruling coalition is in danger of losing its majority, and if that happens, it will likely impact yields and the yen next week.

The Bank of Japan meets next on July 31 and is expected to continue its wait-and-see approach and hold interest rates. The BoJ hiked rates in January but hopes for a series of rate increases were dashed after US President Trump promised and delivered tariffs on many US trading partners, including Japan.

Trade talks between the US and Japan have bogged down and Trump has threatened to hit Japan with 25% tariffs if an agreement isn't reached by Aug. 1. In this uncertain environment, the BoJ isn't likely to raise interest rates.