Markets reacted with the pound strengthening against the dollar, reflecting the likelihood of an earlier rate rise. Yet, global disinflationary pressures from cheaper Chinese imports and falling commodity prices could counteract a pick-up in domestic demand. Across the channel, Eurozone five-year/five-year inflation expectations dropped dramatically on the news of the Renminbi’s devaluation, as highlighted in the chart. Continued imported deflation could force the ECB to extend its quantitative easing programme. When predicting central banks’ next moves across the world, investors would be wise to listen to Socrates: “The only true wisdom is in knowing you know nothing”.
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