Danske Research discusses the current inflation cycle and its impact on FX markets.
"In response to the high inflation, fiscal policy is globally being eased more than it otherwise would have been for 2022. In the West (US, Canada, UK and EU), the currently envisaged measures strike us as being small - some EUR 150bn, mostly in EU. An all-in on cash-transfers and zeroing VAT & fuel taxes would be a substantial fiscal easing, though quite unrealistic at present. A realistic back-of-envelope scenario would be EUR300-500bn (current measures generally run until summertime and can be extended)," Danske notes.
"Aggregating the current 'inflation shield' in UK, Canada, US and EU - we see a small package of 0.3% of GDP. Realistically, that can grow towards 1% of GDP this year. If politicians go all-in, the scope is 4-5%. However, these measures will not fix the underlying supply issues though, and risk pushing inflation higher from already elevated levels...All things else, these measures support commodity prices and hence - USD, CAD, NOK," Danske adds.