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The USD in 2021: Is Inflation on the Horizon?

September 9, 2020 by Daniels Trading| Tips & Strategies

When it comes to addressing USD inflation and futures marketing, timing is everything. Inflationary cycles can arise quickly, wreaking havoc on sectoral or aggregate economic conditions. However, given the proper perspective, astute futures traders can mitigate inflation’s downside while taking advantage of the upside.

What Is Inflation?

Inflation is a periodic increase in the prices of goods and services. If the prices of food, clothing, housing, and other staples rise disproportionately with incomes, undue pressure may be placed on consumers. Unless you’re in an industry that benefits from an inflationary cycle, the negative impacts can be severe.

Prices of goods and services can rise for many reasons. A few of the most common factors are increased demand, higher production costs, and expansive fiscal policy by governments or central banks.

Inflation is primarily measured in two ways: the Consumer Price Index (CPI) and the Producer Price Index (PPI). Each metric quantifies the price changes of a specific basket of goods and services local to either consumption or production. When it comes to USD inflation and futures marketing, active traders and investors frequently take both CPI and PPI into account.

Our blog has critical trading information perfect for new and experienced traders, hedgers, producers, and investors.

Lagging to Robust Inflation

Typically, the monetary policy established by a country’s central bank is the mechanism by which inflation is managed. In America, the U.S. Federal Reserve (Fed) is commissioned to craft policy that promotes maximum employment, pricing stability, and sustainable economic growth.

To accomplish these objectives, the Fed pursues a long-term 2 percent inflationary objective. At 2 percent, wages and prices are thought to move upward in tandem, promoting stable economic growth. Since 2011, annual average inflation has either lagged behind or modestly outperformed the Fed’s 2 percent benchmark.

Historically, high rates of inflation have been observed in nations experiencing trying economic times. A few examples include late-18th-century America, pre-WWII Germany, and the Argentine Crisis of 2001. Each of these periods of inflation occurred under extraordinary circumstances, and many analysts believe that the 2020 novel coronavirus (COVID-19) pandemic may produce another significant inflationary cycle.

Will COVID-19 Lead to Mass USD Inflation?

Increased government spending and accommodative monetary policy have been common denominators in many historic inflationary cycles. Analysts view the COVID-19 pandemic as a catalyst for each in the United States:

  • Government stimulus: In response to the COVID-19 pandemic, the U.S. government launched the CARES Act. Under CARES, more than $2 trillion in assistance to workers, businesses, individuals, and industry was distributed. This act was the first of its kind, to be followed by additional government programs.
  • Fed quantitative easing (QE): During the height of market volatility, the Fed launched a policy of unlimited QE. According to unlimited QE, completely open Fed purchases of U.S. Treasuries, corporate debt, and other assets were authorized. Shortly after launch, the Fed’s balance sheet eclipsed US$5 trillion for the first time ever.

For investors who closely monitor USD inflation and futures marketing, 2021 is going to be a fascinating year. To fight the COVID-19 economic fallout, the U.S. government and the Fed adopted aggressively expansive policies―will 2021 be the year inflation becomes a leading market driver?

According to the CME FedWatch Index, the answer is a definite “maybe.” At the time of this writing, the CME FedWatch assigned a 100 percent probability to the Fed holding interest rates at 0.0-0.25 percent until at least March 2021. Between these interest rates, two or three separate trillion-dollar-plus U.S. government stimulus packages, and the extension of unlimited QE, the supply of USDs will increase at an unprecedented 12-month rate.

If inflation does spike, fund managers and institutional investors are likely to focus on preserving wealth from peril. On the other hand, active futures traders will go to work with a few of these tried-and-true inflationary strategies:

  • Buy commodities: Commodities such as gold, crude oil, and agricultural products are traditional hedges against inflation. By buying deferred-month futures contracts facing these assets, traders may be able to capitalize on rising prices.
  • Short the USD: By shorting the USD, futures traders may be able to profit on the slumping value of the greenback. There are several ways to accomplish this feat, including selling USD Index futures or buying foreign currency futures such as the Euro FX or Japanese yen FX.

Understanding USD Inflation and Futures Marketing Is No Easy Task!

At the very least, USD inflation and futures marketing is a complicated subject. Subsequently, grasping concepts such as Fed policy and advanced economics takes time and effort. Fortunately for active traders, staying current on inflation is as easy as subscribing to Daniels Trading’s online futures blog. Featuring timely insights and analysis, the Daniels Trading futures blog is a valuable asset for any active trader.

Sign up for the Daniels Trading Blog today

Filed Under: Tips & Strategies

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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