08.06.202110:45 Forex Analysis & Reviews: World may face financial crisis due to rising inflation

The US dollar has once again sagged due to a row of factors, including monetary stimulus and inflation expectations. Market participants and experts closely follow the price dynamics of the greenback and especially EUR/USD.

On Monday, June 7th, the greenback sagged against the basket of currencies. The market is focused on two important events this week – the Governing Council meeting of the European Central Bank and the release of the US inflation report. The greenback may come under pressure amid the publication of data. At the same time, the forex market sees no reasons why the Fed should change monetary policy or wrap up the quantitative easing program.

The market is currently at the crossroads because it is not clear what path will be taken by the leading central banks - the ECB and the Fed. Analysts assume that if the European regulator clarifies its stance on the asset purchase programme, its wrapping up in particular, the market will perceive it as a bullish signal for EUR/USD. However, there is currently no need for that, as well as for tapering the QE program by the Fed. According to preliminary forecasts, the ECB will strive to slow down growth of the euro.

The current strengthening of the single European currency is the result of expectations that the ECB will tighten its monetary policy. At the same time, many experts suggest that it is too early to take such a step. The European regulator's dovish monetary policy stance is believed to cancel the recent upward movement of EUR/USD.

Rabobank strategists expect EUR/USD to fall below 1.2000 during the course of the next three months. Meanwhile, early on June 8th, the pair traded at 1.2177, attempting to move higher.

The upcoming inflation report in the US is weighing on the greenback. Debates about inflation and tapering of the QE program are likely to dominate the market in the short term. Inflation in the US is projected to accelerate to 4.7% from 4.2%. In April, inflation soared to its 13-year high.

Deutsche Bank analysts express their concern that the monetary authorities are focused on stimulus while dismissing inflation fears. They assume it may lead to devastating consequences for the economy by 2023. Inflation may look like it will go away but is more likely to persist and lead to a crisis in the years ahead, according to Deutsche Bank. The company contends that the Fed's intention not to tighten policy until inflation shows a sustained rise will have dire impacts.

At the same time, most American politicians tend to believe that the current inflation growth is temporary and will fade as soon as the COVID-19 pandemic is over. Meanwhile, the Deutsche team disagrees and says that aggressive stimulus will push inflation ahead. "Neglecting inflation leaves global economies sitting on a time bomb," Deutsche's chief economist Folkerts-Landau said. "The effects could be devastating, particularly for the most vulnerable in society. In turn, this could create a significant recession and set off a chain of financial distress around the world, particularly in emerging markets."

The bank said interest rate hikes could "cause havoc in a debt-heavy world." Emerging economies where growth won't be able to overcome higher financing costs are likely to be hit by a financial crisis first. All this may have an adverse impact on the US dollar that is already tired from a constant bearish move.