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MARKETS BRACE FOR US INFLATION TEST

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      August 11, 2022 11:05 PM MDT
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  • MARKETS BRACE FOR US INFLATION TEST

    Investors have turned more cautious ahead of July’s US consumer price index (CPI) this afternoon. Both bonds and stocks are on the retreat. The US benchmark S&P 500 dropped for a fourth straight session, following a rally from its mid-June lows that topped 10%. Bond curve inversions are deepening, and the US dollar trades solidly ahead of the inflation report.To get more news about FXTM富拓外汇, you can visit wikifx.com official website.

    Although headline inflation is forecast to show a mild slowdown and markets are expecting the US Federal Reserve (Fed) to pivot from monetary tightening next year, the Fed’s sticky price indicators remain at multi-decade highs. A Fed official also stated US interest rates should rise to 4% this year if inflation pressures persist, which has boosted US dollar demand. A hotter-than-anticipated CPI report will likely increase rate expectations and the dollar, whilst an in-line report should support the market’s view of a 75-basis point hike in September, which currently stands at a 70% probability. How the figures affect views on Fed tightening will be key for global risk sentiment and thus market volatility is likely to remain elevated.
    More and more currency strategists are forecasting GBP/USD to fall between $1.14 and $1.20 over the coming months amidst UK recession fears and a widening interest rate differential between the US and UK. Both UBS and Societe Generale have recently joined the bearish GBP clan, which matches our assumption given the UK is not immune to the European energy crisis.

    The pound could fall to the lowest level since the pandemic market turmoil in March 2020 as the UK energy crisis continues to overwhelm households, weighing consumer morale which is already near record lows. UK economic activity has been relatively resilient compared to Europe, but the latest dire forecasts by the Bank of England (BoE) point to the UK slipping into recession next quarter and not escaping until 2024. Moreover, the Fed’s rate-hike path continues to outpace that of the BoE’s, which is another drag on GBP/USD. Sterling has fallen over 10% year-to-date against the dollar, is over 9% below its 2-year average rate and trading below all of its key simple moving average – in another signal of a prolonged downtrend for now.
    Oil prices have been volatile this year – rising over 80% from $70 a barrel to a peak of $130 a barrel due to supply disruptions combined with increased demand largely due to the war in Ukraine. Currencies of oil-exporting nations like the CAD and NOK charged higher this year, but due to Norway’s currency being more prone to risk aversion, it has weakened over recent months and it’s the Canadian dollar which is still outperforming.

     

    Brent crude oil prices are down over 30% from their year-to-date peak, as investors anticipate a global economic slowdown. A key factor behind deteriorating growth prospects remains high inflation, which is sapping consumers' real incomes and raising business costs. This is especially a problem in the G7, where inflation is expected to average 7% this year, although there has been some relief in this area recently due to the falling oil prices and some other commodities. Despite this fact, the Canadian dollar has shown resilience, due to its positive terms of trade (running largest trade surplus in 14 years) being a commodity exporter and Canada’s hawkish central bank recently raising interest rates by 100 basis points to 2.5% - its steepest hike since 1998.

      August 11, 2022 8:48 PM MDT
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