Synopsis:
BofA highlights a growing, though unspoken, concern among central banks: the threat of stagflation. While policymakers avoided naming it directly, their forecasts of stickier inflation and softer growth suggest an increasingly complex policy mix—especially in light of upcoming US tariff decisions in April. This “S-word” scenario is becoming more central to FX markets, where the interplay between inflation, growth, and central bank reaction functions will shape G10 currency dynamics through mid-year.
Key Points:
1️⃣ Stagflation Concerns Whispered, Not Named 📉🔥
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Central banks are increasingly acknowledging higher inflation + weaker growth, though avoiding the term "stagflation."
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Fed Chair Powell revived the term “transitory”, but projections tell a more cautious story.
2️⃣ Tariffs Cloud the Outlook 🌐⚠️
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April tariff announcements from the US pose clear inflationary risks, while acting as a drag on growth.
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This uncertainty is broadly recognized across central banks, except for the SNB.
3️⃣ Policy Response in Focus for FX Markets 🏦💱
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FX volatility will hinge on how central banks balance inflation risks vs growth deterioration.
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The unemployment rate is emerging as a proxy for growth deterioration in real-time.
4️⃣ G10 FX to Be Driven by Diverging CB Reaction Functions ⚖️
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With inflation sticky and growth fragile, policy asymmetry across the Fed, ECB, BoE, BoJ, and others will guide FX trends.
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Expect more sensitivity to macro surprises as markets re-price expectations on both rates and currencies.
Conclusion:
BofA warns that stagflation, though unnamed, is rising as a central theme in monetary policy deliberations. The interplay between tariffs, inflation, and weakening growth puts central banks in a tightening policy vise. For G10 FX markets, how each central bank reacts to this uncertain mix—and how quickly—will determine currency direction in the months ahead, making CB reaction functions the dominant driver of FX price action.
