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BoE facing tough decisions

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6 mins read

By Craig Erlam

Equity markets seem mildly positive in early trade on Tuesday, adding to modest gains at the start of the week.

While the rally is perhaps slowing a little after the strong gains of recent weeks, there doesn’t appear to be much appetite to bail on it.

Perhaps, the experience of the last year and the huge declines in equity markets have left investors seeing substantial value and they’ve become excited at even the prospect of a bull run. Perhaps there’s some FOMO at play after a long time of such opportunities being few and far between.

Not a great UK labour report

I’m not entirely sure who will look at the UK labour market and be able to take many positives from it.

The unemployment rate ticking up when job vacancies have fallen for the fourth month may suggest to the Bank of England that slack is appearing. But at the same time, the rate remains very low and wages excluding bonuses rose by 0.2% to 5.7%, exceeding expectations, which will be a concern when inflation is already above 10% and rising.

Inactivity is another negative takeaway as this makes the job of increasing slack in the labour market all the more difficult.

Whichever way you look at it, this isn’t a great report and it will likely keep the pressure on the BoE to keep hiking aggressively, creating further headwinds for the economy.

Sensible RBA minutes

The key takeaway from the RBA minutes overnight was that forward guidance will no longer be a tool the Australian central bank leans on, unless there is value in doing so.

The RBA wants to maintain a flexible approach based on the incoming data rather than be tied to its guidance, which makes a lot of sense in these highly uncertain times. It highlighted the benefits of explicit and specific guidance in certain situations, but the current one simply doesn’t tick any of those boxes.

As such, while a 25 basis point hike was appropriate at the last meeting – and I assume will be at the next – the central bank could move back to 50bps should the data warrant it. That all sounds very sensible.

Oil treading water

Oil prices are basically flat on Tuesday, sitting a little below the middle of their recent trading ranges as traders continue to weigh up the global economic outlook, OPEC+ production risks, and China’s Covid approach.

Prices remain choppy and that’s likely to remain the case given the ongoing uncertainty around these key areas.

Everyone became much more optimistic around the US after last week’s inflation report, but that appears to have quickly faded. Enormous downside risks remain around the global economy next year even if the Fed pauses its tightening a little sooner and perhaps that reality is kicking in again.

Gold rally stalls

The great gold recovery has stalled, with the yellow metal only slightly higher on the day after dipping a little earlier in the session. That follows a similar pattern to Monday and could be viewed as a positive sign given the reluctance to allow the recent rally to retrace in any considerable way.

It has been a very impressive recovery though, up around 10% from the lows earlier this month, so a corrective move wouldn’t come as a surprise. It’s seeing resistance around $1,780, a level that was a major area of support earlier in the year and again in May, before finally crumbling in early July. A move above here would be a significant technical breakout.

Traders tempted to sidestep cryptos

Bitcoin is fighting back on Tuesday, but it remains very much on the ropes. Gains of more than 2% barely offset the losses since Friday, let alone what came earlier that week.

Cryptos remain very vulnerable, not just to the fallout from FTX – the full extent of which remains a cloud of uncertainty over the industry – but also to what else may be uncovered as the environment becomes ever more challenging.

What we’ve seen recently will be discouraging to some who may have become tempted in recent years but with rates no longer at zero and more traditional assets arguably becoming attractive once more, traders may be tempted to sidestep cryptos and wait for the storm to pass.

 

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.