First the GBP, then the EUR, rallied on inflation worries (top middle and top left charts). In the UK, high inflation prompted speculation that interest rates will have to rise; in the Eurozone, comments by Jean-Claude Trichet about the ECB’s concern about inflation and preparedness to hike interest rates sparked the rally. Whether you think these banks will hike rates is not the issue. The fact is, the probability of rate hikes has increased and the markets have priced it in.
Since 2007, I have thought that every inflation scare and expectation of rate hikes was nonsense. At my previous job, we were putting on trades to benefit from low rates in December 2010 in early 2009. Now I am concerned that my beliefs have been hardened by success — there will be a tightening cycle one day, and I hope I will be able to see it coming.