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A small setback

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By Craig Erlam  

Equity markets opened a little softer on Wednesday following similar moves in Asia overnight, as investors weighed up the latest setback in US data.

The inflation report needed to over-deliver after the red-hot labour market figures earlier in the month and it simply didn’t do it. The trend remains positive, but it may be stalling and that won’t give the Fed any encouragement to stop raising interest rates.

The next 25 basis point hike was never really in doubt anyway, but now markets are factoring in much more, including another in May and a good chance of one more in June.

What’s more, those rate cuts that were priced in for the end of the year only a couple of weeks ago are no more. Markets are pricing in the possibility of one, but the anticipated year-end rate is now significantly higher, as is the terminal rate.

A long way to go

UK inflation may still be far too high, but the January CPI report has offered some cause for optimism, slipping faster than expected on both a headline and core basis.

The headline number remains above 10% so there’s still a very long way to go, but favourable base effects and lower energy prices should go a long way in driving this much lower over the course of the year.

The Bank of England may be particularly encouraged by the core decline as this is where we’re likely to see stubbornness, but this is just one release and there will likely be many setbacks over the course of the year.

Large oil inventory build weighs

Oil prices are a little lower again Wednesday, but remain broadly within the same range they’ve traded in the last couple of months.

China has been a very bullish development for crude oil, but the world economy as a whole is much more uncertain. In addition, the US decision to release oil from the SPR has come as a surprise, given previous commitments to refill the reserve.

What’s more, a shockingly large inventory build reported by API on Tuesday is contributing to the decline ahead of Wednesday’s EIA report. If that’s backed up later in the day, we could continue to see oil drift away from its range highs.

Gold correction continues

The corrective move in gold is continuing after the yellow metal did not get the lift from the US inflation report that some were hoping for.

It’s broken below $1,850 again and could continue lower from here, with the next support coming around $1,820-1,830, although a bigger test may come around $1,780-1,800.

Ultimately the recent data has not been particularly favourable and that’s been evident in the shift in interest rate expectations this year. A higher terminal rate and potentially no rate cuts this year is not a good near-term development for the yellow metal.

BTC correction run its course?

Bitcoin enjoyed a decent rebound on Tuesday despite broader market sentiment being more challenging on the back of the US inflation report.

We continue to see resilience in cryptos which is encouraging despite regulatory headlines not being particularly good.

Of course, it’s now retraced back to a level that was a notable area of support in late January and early February before it corrected and we’ll soon see whether that’s become a bearish resistance zone or the corrective move has run its course.

 

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.