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Summary The Consumer Price Index increased 1.0% in May, topping consensus expectations for a 0.7% increase and our own forecast for a 0.8% gain. Inflationary pressures were seen nearly everywhere. Energy prices surged, led by a 4.1% increase in gasoline prices, while grocery prices increased 1.4% and pushed the year-ago rate to a pace not seen since the 1970s. Core goods inflation had shown some signs of slowing over the past few months, but this trend largely reversed course in May. Core goods prices increased 0.7%, led higher by apparel and vehicles. Core services inflation rose at a similar pace and with broad-based drivers including surging airfare prices and solid gains in shelter costs. Simply put, inflation remains far too high for the Federal Reserve's liking. Until inflation is demonstrably on the downswing, we expect the FOMC to fight back aggressively with tighter policy. Another 50 bps rate hike is all but assured at next week's FOMC meeting, and a couple more 50 bps hikes in July and September seem highly likely. Across the board pain The “clear and consistent” progress Fed officials are looking for on inflation remains elusive. The Consumer Price Index rose 1.0% in May, pushing the… Read More »CPI: Worst still to come

The dollar accelerated higher after US inflation data on Friday and hit the highest in three weeks. Much hotter than expected inflation fueled expectations for more aggressive Fed in coming meetings, although the central bank already showed its hawkish stance and readiness to use all available tolls to bring soaring prices under control. From the technical point of view the picture remains firmly bullish, as today’s rally surged through  key Fibo resistance at 103.61 (61.8% of 105.04/101.29 bear-leg) and also cracked the next level at 104.16 (Fibo 76.4%), 14-momentum is in stee=p ascend in the positive territory and rising thick daily cloud continues to underpin the action. Also, the index is on track for strong weekly gains (around 2%) and completed reversal pattern on weekly chart, signaling that 105.04/101.29 corrective pullback is likely over. Short-term outlook remains bright for the greenback, as inflation is expected to remain red-hot for some time (until Fed’s measures start to give results) and geopolitical uncertainty over the Ukraine crisis will continue to boost demand for safe-haven dollar. Overbought conditions suggest bulls would face headwinds on approach to key barrier at 105.04 (2022 high) with limited dips to offer better buying opportunities. Res: 104.68; 105.04;… Read More »Dollar rises further on hot US inflation

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FOMC meeting – 15/06 – as we look ahead to another Federal Reserve meeting it will surprise no-one that the Fed will be raising rates by another 50bps this week to 1.5%, to be followed by another 50bps next month. This month also sees the start of the balance sheet reduction program starting with $47.5bn, rising to $95bn a month after 3 months. In recent weeks, the debate has shifted from the certainty of 50bps rate hikes in June and July and has moved towards the prospect of another 50bps in September.  A number of Fed policymakers have indicated they want to see the Fed funds rate back to neutral by the end of this year, with a consensus of around 2.5%, however there is still some divergence where the neutral rate actually is. Kansas City Fed President Esther George has suggested 2.5% as a starting point, while St. Louis Fed President James Bullard put it lower earlier this year at 2%, while calling for rates to rise to 3.5% by year end. Atlanta Fed President Raphael Bostic also appears to be in the camp of a lower neutral rate of between 2% and 2.5% while also floating the idea… Read More »The week ahead: Federal Reserve, Bank of England, BoJ, Tesco and Boohoo results

Summary United States: Prices Push Higher in May, Signaling Little Immediate Relief for Consumers Consumer price inflation continued to push higher in May, with the consumer price index rising more than expected and lifting the annual rate of inflation to a fresh 40-year high. Consumers continue to feel the pinch of higher prices, evident in the persistent deterioration in consumer sentiment. To date, households have demonstrated uncanny staying power in the face of inflation, but with little signs of immediate relief from prices, this will only become more challenging. Next week: Retail Sales (Tue), FOMC Rate Decision (Tue), Housing Starts (Wed) International: European Central Bank Readies Rate Hike as Reserve Bank of Australia Delivers The European Central Bank (ECB) took another step this week on its path of policy normalization at its latest monetary policy announcement. The ECB said it intends to raise rates by 25 bps in July, perhaps by an even larger amount in September, and deliver a steady series of rate hikes over time. The Reserve Bank of Australia surprised markets with a larger-than-expected 50 bps rate increase, which we expect it will follow up with another 50 bps hike at its July announcement. Next week: U.K.… Read More »Weekly economic and financial commentary

The coming week is loaded with central bank meetings to shake things up in the FX arena. Fed officials are almost certain to raise rates by half a percentage point, so markets will be driven mostly by their future projections. The Bank of England could also lift rates but strike a cautious tone. Nothing is expected in Japan, while Switzerland might disappoint those looking for immediate action. 

Gold Price remains on track to register losses for the week. Annual CPI in US rose to a fresh multi-decade high in September. The Fed is widely expected to hike its policy rate by 50 bps next week. Gold Price came under technical selling pressure after falling below the 200-day SMA on Friday and extended its slide with the initial reaction to the US inflation data. After having touched its lowest level since May 19 at $1,825, however, gold retraced a portion of its daily decline. Nevertheless, XAUUSD was last seen losing 1% on a weekly basis.  Buyers move to the sidelines The fact that XAUUSD failed to hold above the 200-day SMA suggests that buyers remain hesitant and stay on the sidelines. With the latest data from the US reminding markets that price pressures are yet to ease and that the Fed is likely to stick to its aggressive tightening stance, gold could find it difficult to attract investors.   Gold Price on the back foot after US inflation data Inflation in the United States, as measured by the Consumer Price Index, climbed to a multi-decade high of 8.6% on a yearly basis in May, the monthly data published by the… Read More »Gold Price faces further downside risks as focus shifts to Fed meeting

EUR/USD plunged to a near three-week low after the ECB announced its decision on Thursday. The lack of a clear signal for 50 bps disappointed investors and weighed on the shared currency. Elevated US bond yields, the risk-off mood benefitted the USD and contributed to the selling. The focus now shifts to the crucial US consumer inflation figures for May, due later this Friday. The EUR/USD pair witnessed a dramatic intraday turnaround on Thursday and tumbled over 150 pips from the weekly high after the European Central Bank (ECB) announced its policy decision. As was widely expected, the ECB decided to leave key interest rates unchanged and end its long-running asset purchase program as of July 1, 2022. In the accompanying policy statement, the central bank sent a clear signal that it would deliver its first rate hike since 2011 in July and left the door open for a potentially larger move in September. The shared currency did get a minor lift in the wake of the hawkish outlook, though it struggled to capitalize on the move. The ECB failed to specify the size of the rate hike in September and said that it would be dependent on the inflation… Read More »EUR/USD Outlook: Post-ECB trading range breakdown favours bearish traders, US CPI awaited

MARKETS Equities are selling off again with a lot of macro data points to digest ahead of CPI later today, including China's Covid situation regressing and the hawkish pivot from several central banks this week triggering rates higher stock markets lower negative feedback loop. Not to mention the increasing number of corporate profit warnings, as inventories swell they tend not to age well. With monetary policy feeding lower growth expectations, there is a degree of circularity stagflation concerns building as central banks continue surprising to the hawkish side with no end in sight until inflation moves more convincingly towards the target. Indeed, this week highlights a broader point about central banks' implicit comfort in accepting lower asset prices. But worryingly, the markets are now concerned US CPI did not peak in March, and indeed there may be even higher prints in the coming months. Continued strong inflation prints would put the FOMC under pressure to move faster on rate hikes which would provide massive soundboard for the hard landing crowd. In any case, this stagflation narrative has begun to play out in broader macro, with curves flattening and commodities struggling to push on while the dollar remains bid. Therefore, it… Read More »Circularity stagflation concerns, Euro falls like a faulty hot air balloon and oil wobbles

Outlook: Today the main release is jobless claims and hardly anyone will try to make a mountain out of that molehill. The one important data this week is tomorrow’s CPI, likely an advance on the most recent numbers, 8.3% in April from 8.5% in March but perhaps back up to 8.4-8.5%. Bloomberg tells us to worry about the yen getting too weak, nearing a 24-year low that “may spark turmoil on the scale of the 1997 Asian Financial Crisis if it declines as far as 150 per dollar, according to veteran economist Jim O’Neill. Speculators are gathering around the beleaguered currency and positioning is by no means extended, suggesting there’s still room for bears to pile in. Some 74% of Japanese business managers say a weak yen is having a negative impact on the nation’s economy.” No, the Asian crisis was caused by over-extended credit to Thailand and other EMs, then a dawning realization that many emerging markets had borrowed too much, including Argentina and Russia. Those high-yielding bonds crashed on plain, old-fashioned sovereign credit risk. Currencies fell afterwards. While it’s true Japan has the most debt of any of the majors by any measure (per capita, etc.) most of… Read More »The Asian crisis is caused by over-extended credit to Thailand and other EMs