The disinflation trade

12.07.2023 – The market firmly believes that inflation in the USA will fall. This would give the Federal Reserve fewer arguments to raise interest rates. The dollar falls, equities rise, the yield on US government bonds falls. And above all, sterling is gaining against the greenback.

By this Wednesday afternoon, we’re all smarter: the majority of analysts expect annual core Consumer Price Index in the U.S. to slip from 5.3 to 4.9 percent – will be the third consecutive decline. On a month-on-month basis, the consensus stands at plus 0.2 percent.

Declining inflation?
If the numbers come in like that, or even weaker, it would give the Fed less of a case for another rate hike. The stock market would celebrate disinflation. But if inflation turns out higher, there could be a damper on the rate front for now. “Our economist expects a consensus 0.3% month-on-month core read, which should keep providing encouraging news on the disinflationary story – but should still fall short of tweaking the Fed narrative or convincing markets to price out a July hike,” ING analysts judged.

Source: Bernstein Bank GmbH

The trade on inflation expectations in the GBPUSD currency pair will be particularly interesting. Sterling just climbed to a new 15-month high – the picture above shows the daily chart. On the island here, investors expect further interest rate hikes. That’s because inflation in the U.K. is at 8.7 percent – the highest inflation in Western industrialized countries. Wages on the island are rising rapidly.

At the same time, the Bank of England’s Financial Stability Report stated that financial institutions in the UK are “strong enough” to deal with the risk of rising mortgage rates. Ergo, banks can probably absorb bad loans well. This doesn’t look like the central bank cares about homebuilders.

Expensive mortgages

We had already talked about this topic: In the U.K., most mortgage loans are floating rate or, at best, short-term. When the prime rate rises, it gets expensive for households. Which can lead to a recession, because consumers drastically cut back on consumption. The experts at Moneyfacts found out exactly how expensive it will be: according to them, the average two-year fixed interest rate costs 6.66 percent. That is the highest level in 15 years.

The conclusion from all this: GBPUSD is currently an interesting currency pair in terms of monetary policy. Whether long or short – we wish you successful trades and investments!


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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.