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UK inflation brought more good news, FOMC minutes next

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By Naeem Aslam  

US and European futures are mainly focused on two important economic events: the UK’s CPI data and the FOMC Minutes.

UK inflation data has brought much-needed good news for the economy and confirmed that the strict monetary policy is working now as inflation is in a free fall. This is music to the ears of many Brits who have been struggling with the cost of living crisis and living under the threat of a deep recession taking place.

However, the reality is that consumers have been spending, and we have seen evidence of this in the UK’s GDP data, which was released recently, and Tuesday’s wage growth data, which also supported the narrative of why consumers are still spending.

The main question for many traders and investors is what the Bank of England is going to make out of this news. This is because the actual number was slightly ahead of expectations, but much better as compared to the previous one.

What matters now for the Pound and for the markets is the direction of interest rates; many believe that the bank is already nearing its peak when it comes to hiking the interest rates.

Although the inflation reading has started to fall off a cliff, one should not get lost in all the noise and focus on the reality, which is that the inflation reading in the UK is still much higher than the Bank of England and that the number is still the highest among G7 nations.

There are still chances that the BOE will increase the interest rate by another 25 basis points at their next meeting, while they will appreciate the fact that the current trajectory and the pace of inflation decline are highly satisfactory.

In the US, it is all about one thing and one thing only, and that is what the Fed Chairman is going to say on Wednesday about the interest rate.

The less Chairman Powell says, the better for the US equity markets.

Market players are already highly concerned about the economic slowdown in China, and the dollar index is on the rise as a safe-haven play.

The Fed is very much done with its monetary policy and the time has come for them to continue to enjoy their summer holiday as the most recent inflation reading was highly encouraging. It is because the actual number printed was lower than expected.

Oil Prices

In the energy markets, it is mainly about one factor: China.

Traders are worried that the Chinese economy is suffering from a number of setbacks that are adversely influencing energy demand. Remember, China is a major player when it comes to oil consumption.

Having said this, if one pays close attention to oil prices, they haven’t lost a lot of momentum. Yes, the price action is weak, but the prices haven’t given away a lot of gains as Brent oil prices are still trading well above the support level of 80.

This is mainly because traders know that OPEC Plus is not in the mood for jaw-boning any more and that they meant real business this time. Basically, the reality is that traders do not want to bet against OPEC and get caught on the wrong side of the trade.

Gold

The precious metal is very much a matter of luck, and the price has been in a battle with the 1,900 support level.

Wednesday’s FOMC event is very much going to bring a significant amount of volatility to gold prices.

The odds are stacked more in favour of bears, and this is because the dollar index is on the move and has gained a lot of strength as traders are trying to hedge some risk by supporting the dollar due to the weakness in the Chinese economy.

It is true that the yellow metal is the ultimate safe haven; however, the current weakness in the Chinese economy has failed to stimulate the gold price so far.

There are more chances for the prices to move lower, and the next support of 1860 is very much in focus. However, if the Fed shows an ultra-hawkish tone in the Wednesday meeting, we could potentially see the gold price moving to the upside.

 

Naeem Aslam is Chief Investment Officer at Zaye Capital Markets.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Zaye Capital Markets.