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Mild relief on Powell’s risk rebound

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By Craig Erlam  

European equity markets are expected to open a little higher on Wednesday following a positive shift on Wall Street on Tuesday, while Asia overnight was a very mixed bag.

Investors appear a little relieved at Fed Chair Jerome Powell sticking to last week’s script and toning down risk fears, despite Friday’s jobs report indicating that the labour market remains red hot. It would appear traders had become a little more defensive on the expectation of a hawkish shift, but on Tuesday Powell refrained from taking the leap.

And credit to him for doing so. The central bank, like others, has long talked about one data point not making a trend and while there are causes for concern in last week’s jobs report, it’s not a game changer. Wages are still heading in the right direction, and participation also improved.

That said, we are getting a consistent message from policymakers across various central banks.

While headline inflation is falling and will likely fall much further, core services inflation remains a big concern, and tight labour markets make achieving lower wage growth consistent with 2% inflation targets very difficult.

It’s been clear for a while that the journey back to 2% was likely to be more treacherous than the path to peak inflation, and the data in the first quarter in particular, perhaps the second also, was going to highlight that.

Recent jobs reports have epitomised that and sentiment in the markets is likely to continue mirroring it in the coming months. ​

China to drive stronger demand

China may well be the outlier in all of this as there has been no need for excessive monetary tightening and rather, the slowdown in growth is almost certainly behind it.

In fact, the transition from zero-Covid to living with it, is reportedly going very smoothly which could boost the economy earlier and by more than expected, leading to higher growth forecasts for 2023.

While that could support the world economy through a difficult period, it may also worsen the inflation problem due to much higher demand for commodities including crude oil.

Oil prices have been trending higher in recent days on these improved forecasts, although they still remain around the middle of the range they’ve traded within since early December.

Gold mildly buoyed

Powell’s words generated some relief in gold as well overnight, although compared to the declines late last week, it was quite mild. The yellow metal has been on a phenomenal run since early December and a correction was growing ever more likely.

While traders have welcomed Powell’s consistent stance, it may not be enough to save gold and a deeper correction could well be on the cards.

It’s seeing some support now around $1,860, but more substantial support may be found around $1,820-1,830.

Year of the crypto revival

Bitcoin also enjoyed some light relief from Powell’s risk rebound overnight and it came at a good moment as the cryptocurrency was beginning to flirt with range lows.

It’s now safely back in the middle of a near three-week range and still holding onto the bulk of the new year gains. 2023 may well be the year of the crypto revival.

 

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.