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Nerves ahead of US inflation

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By Craig Erlam

We aren’t seeing much change in Europe ahead of the open on Tuesday after a broadly positive session in Asia as China, Hong Kong and South Korea returned following the bank holiday weekend.

The last few days have seen a notable improvement in market sentiment.

It’s not easy to pinpoint what’s driving such a turnaround, but the fact that it’s happening in the days leading up to the US inflation report is interesting. Perhaps last month’s report has given investors’ confidence that another faster deceleration could be on the cards for July.

That may sound premature, but the fact is two consecutive reports showing a sharp deceleration combined with last month’s goldilocks jobs report will be a really encouraging sign and could trigger a broader risk rebound in the markets.

It may not be enough to tip the Fed balance in favour of a more modest 50 basis point rate hike next week, but it may slow the pace of tightening thereafter.

The Ukrainian counteroffensive in previously Russian-controlled territories in the east and the south, most notably in Kharkiv, may also be lifting sentiment. Pressure will mount on the Kremlin and while there’s no saying what its response will be, there’s more hope that momentum is moving back in favour of Ukraine.

Meanwhile, Europe is putting together plans to cope with higher energy prices this winter, with the UK joining others in setting a cap on energy bills.

While that won’t solve the problem of supplies or generate as much demand destruction, it will protect many households and businesses that otherwise wouldn’t have been able to cope this winter and could save the UK from recession. If not, it will no doubt make it much less severe.

Not what BoE wanted

It’s not often that you see the unemployment rate fall to the lowest in almost 50 years and aren’t overjoyed, but that will certainly be the feeling at the Bank of England right now.

The decline in the rate was driven by a decline in the labour force, while employment rose by only 40,000; far less than expected.

What’s more, wage growth accelerated faster than expected, hitting 5.5% including bonuses in the three months to July, compared with the same period last year.

Less labour market slack and faster wage growth increase the odds of a 75 basis point hike from the MPC next week, especially against the backdrop of higher core inflation expectations over the medium term as a result of the new cap on energy bills.

Oil steady after rebound

Oil prices are relatively steady so far Tuesday after rebounding strongly in recent days. An improvement in risk appetite in the markets combined with a softer dollar may have contributed to the crude recovery.

Especially when combined with another stall in negotiations between the US and Iran over the nuclear deal and recent warnings from OPEC+ about output.

The price of Brent was trading near six-month lows prior to the rebound and that may have got traders a little nervous.

Gold steady ahead of inflation report

Gold is relatively flat on the day after recovering well in recent days.

A weaker dollar and stable US yields have aided the moves in the yellow metal, but we’re seeing that stall ahead of the inflation data.

The near-term outlook will be heavily influenced by the August report, especially if we see another sharper deceleration in price growth. If inflation doesn’t retreat as much as expected, that disappointment could hit gold hard and potentially draw focus back towards $1,680 where it previously saw strong support.

Can Bitcoin build on the recovery?

Bitcoin is holding onto gains ahead of the inflation data.

The recovery has been very strong until this point but it may need a favourable report in order to hold onto them. A positive inflation number could see bitcoin add to recent gains with the next major test to the upside falling around $25,500.

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.