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📊 INFLATION EXPECTATIONS — WHY MARKETS MOVE BEFORE CPI
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💡 THE CORE IDEA
Currencies don’t wait for inflation data.
They move on what inflation is expected to be.
Inflation expectations shape interest rate paths, bond yields, and real returns — long before CPI prints confirm anything.
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📊 WHAT ARE INFLATION EXPECTATIONS?
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Inflation expectations reflect how much inflation investors believe will occur in the future.
They are priced continuously in financial markets.
Key sources:
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Bond markets
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Inflation-linked bonds
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Surveys
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Central bank guidance
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📈 HOW MARKETS MEASURE EXPECTATIONS
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Breakeven Inflation
= Nominal bond yield − Inflation-linked bond yield
Example:
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10Y nominal yield: 4.5%
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10Y inflation-linked yield: 2.0%
→ Breakeven inflation: 2.5%
If breakevens rise → inflation expectations rising
If breakevens fall → inflation expectations falling
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⚠️ WHY EXPECTATIONS MOVE FX FIRST
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1️⃣ Rate Path Repricing
Higher inflation expectations → more rate hikes priced → currency strengthens.
2️⃣ Real Yield Impact
If inflation expectations rise faster than rates → real yields fall → currency weakens.
3️⃣ Credibility Test
If markets lose faith in a central bank’s inflation control → currency sells off fast.
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📉 REAL-WORLD EXAMPLES
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🇺🇸 USD (2021–2022)
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Inflation expectations surged
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Markets priced aggressive Fed hikes
→ USD rallied before CPI peaked
🇪🇺 EUR
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Rising energy-driven inflation expectations
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ECB credibility questioned
→ EUR weakened despite rising CPI
🇯🇵 JPY
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Inflation expectations rose while rates stayed capped
→ Real yields collapsed
→ JPY weakened sharply
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📈 EXPECTATIONS VS REALITY
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Currencies react to the change in expectations, not the level of inflation.
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CPI high but expectations falling → currency weakens
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CPI moderate but expectations rising → currency strengthens
This is why markets often move opposite to headline data.
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⚙️ PRO TIP — WATCH THESE SIGNALS
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Inflation breakevens (5Y, 10Y)
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Bond yield moves without CPI releases
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Central bank language shifts
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Commodity-driven inflation pricing
These often front-run FX moves by weeks.
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🚀 TAKEAWAY
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Forex trades the future, not the past.
Inflation expectations decide interest rates.
Interest rates decide real yields.
Real yields decide currencies.
If you wait for CPI, you’re late.
If you track expectations, you’re early.
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