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Rally stalls amid rate hike uncertainty

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By Craig Erlam  

European markets are in the red on Thursday in what continues to be a choppy week of trading driven by economic and interest rate uncertainty.

We’re now at a pivotal point in the tightening cycle, one made all the more difficult by the mini-banking crisis last month and the ripple effects it will have on credit and the economy over the course of the rest of the year.

Central banks, the Fed in particular, are now at even greater risk of overtightening just as the data may show price pressures easing considerably. The fear of that not materialising will probably drive another round of rate hikes next month, after which discussions will likely be far more balanced.

It’s this uncertainty that appears to be driving the most recent period of choppy trading, especially when the economic data is not yet playing ball; the UK this week is a prime example of that.

Justifying a pause in tightening when inflation is above 10% on the belief it will fall rapidly after being terribly wrong about it being transitory not long ago is tough and I’m not convinced central banks have it in them or feel there’s enough credit in the bank to take the risk. It’s going to be an anxious couple of months.

The ECB decision-making is made slightly less complicated by the fact that interest rates haven’t risen quite as far after being so late to the party and the minutes may well reflect that.

Of course, they may also highlight anxiety within the committee in relation to the proximity of the meeting to those bank failures.

Is oil looking to close the gap?

We continue to see a correction in oil prices following a more than 2% decline on Wednesday. That saw the crude price move below the post-OPEC+ cut lows from a couple of weeks ago and move into the void left by that surprise announcement.

Now it’s a question of whether that gap will be filled, with the high from the Friday before falling just shy of $76 for WTI and $78 Brent. That would require another drop of 3%, but will only take the price back to the middle of the range oil was trading in for months prior to the SVB collapse.

Gold rebounds, may need Fed boost

Gold prices rebounded on Wednesday after falling back toward $1,970, a little above the $1,940-1,960 region that stood out as a big support region.

We could still see further pressure to the downside for gold prices if yields continue creeping higher, but that has stalled a little following a decent rebound in recent days.

It still feels like markets are finding their feet in the aftermath of the mini-banking crisis last month and I don’t think we’re even there yet.

The full ramifications on credit markets and the economy will soon become clear, after which we could see a significant adjustment in interest rate expectations, bond markets, and therefore gold. If that adjustment is much lower for rates, record highs may not be that far away.

Profit-taking in bitcoin?

Bitcoin is slipping again on Thursday after breaking below $30,000 a day earlier, following a few choppy days of trade.

It’s now seeing some support around $29,000 where it saw resistance in late March and early April, but after such a prolonged rally since early January – more than 80% – the recovery may be running on fumes.

 

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.