By Craig Erlam
Markets ended the week on a positive note, but there remains enormous uncertainty around inflation and interest rates that look set to continue throughout the summer.
Expectations are changing considerably on a regular basis, with markets now pricing in no rate cuts in the US this year, but a strong chance of one more hike, which still falls short of the median two from the Fed dot plot.
The central bank opted to buy itself time on Wednesday which may prove to be a good decision, given the scale of tightening already seen and the progress we’re seeing across a selection of indicators.
The ECB, on the other hand, believes there’s still more to do, so much so that it insisted that barring material change, another 25 basis point hike will follow in July. Investors mostly took this on board, but perhaps not as strongly as President Lagarde would have liked.
There are a number of other interest rate decisions to come next week, with the Bank of England being the standout, considering it’s one of the few central banks that appears to have achieved very little in its battle with inflation.
CPI data released the day before may deliver another blow to ambitions to pause the tightening cycle, bringing the UK another step closer to recession. Could the central bank move back to super-sized hikes?
Oil steadies, further volatility in store
Oil prices were steady at the end of the week, the rest of which has been anything but. There’s been a lot to factor in recently, from OPEC+ (Saudi) output cuts to higher interest rate expectations, deteriorating economic prospects, and rate cuts in China.
In all of that, the price has held in its lower 2023 range – roughly $70-80 for Brent – but it did test the lower end earlier in the week.
Going forward, the focus will likely remain on interest rates and just how much they will threaten economies into year-end, and perhaps what else China has up its sleeve to support the economy.
There was a brief surge in the price of natural gas on Thursday, apparently triggered by plans in the Netherlands to close a field. It may be that this was a knee-jerk reaction to what shouldn’t be big news, but it perhaps highlights how sensitive the market remains to outages, given it triggered a 30% rally at one stage.
Gold rebounds strongly
The slide in the dollar in recent days, alongside US yields since the Fed pause on Wednesday, has given gold a boost going into the end of the week.
Since breaking below the lower end of its recent trading range – between $1,940 and $1,980 – the yellow metal has rebounded strongly and now finds itself not far from the upper end of the range.
With the Fed far from convinced that its tightening cycle is over – quite the opposite in fact, the median estimate is that there’ll be two more hikes this year and one policymaker thinks four.
Markets have now priced out those rate cuts this year, and it may take something significant to sway gold one way or another.
No further hikes looks much more likely after the pause, regardless of the dot plot, but it will require convincing data over the coming weeks.
Bitcoin near lows despite Blackrock SEC filing
Another fascinating week in the crypto space, which ends with Blackrock filing for a spot bitcoin ETF with the SEC, using Coinbase as Custodian.
The same Coinbase that is currently being sued by the SEC for running unregistered securities exchanges.
While this may be a big move over the longer term, you can imagine it won’t be a quick process, which may be why bitcoin traders haven’t got too excited at this stage.
In fact, it hit three-month lows on Thursday before rebounding to trade just below $26,000.
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.