Developed economies keep competing in the pace of recovery. UK data showed on Tuesday that manufacturing activity rose to its highest in more than 26 years:

Interestingly, the Markit report mentioned the same challenge also faced by US and EU producers: supply chain bottlenecks, resources and inventory shortages. This results in the rise of intermediate prices and response to this is the same everywhere - push the increase further in the price chain, i.e. hike end prices. However, the temporary consumer boom against the background of lifting of the pandemic restrictions makes it easy to do this, so cost-push inflation does not yet run into demand constraints, causing steady upward inflation trend.

The data on activity of manufacturers in the US and German economies were somewhat disappointing, but still it was quite strong. Looking under the hood, primary drivers of growth of the broad index were extremely high readings of new orders and prices components, while components of inventories and customer inventories made negative contribution:

Nonetheless, central banks have been slow to sound the alarm and tighten credit conditions in response to the threat of inflation pickup. But there is still some progress in this matter. Yesterday the head of the New York Fed Williams spoke, who admitted that the Fed could raise interest rate on excess reserves for banks or reverse repo rate. Both measures are intended to remove excess liquidity from the banking sector, although they are quite technical in nature. However, in the past, they preceded the start of normalization of credit conditions, so the dollar bulls took this hint with great optimism.

On Tuesday, we saw increased demand for greenback thanks to Williams comments, USD index climbed to 91.40 which is highest level since the start of the week. Today, the report on activity in the US service sector from ISM is due which should help to prepare better to the NFP surprise as well as give an idea of what is happening with services sector inflation in the US. Strong reading, especially driven by prices and hiring components will likely to push USD index higher with potential test of 91.55 resistance level, however further upside is under question and will require more reflation optimism, i.e., strong NFP surprise.

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