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Market calm post-US CPI

12 August 2021

After yesterday's slightly disappointing US inflation data release, markets are in wait-and-see mode about how the Fed addresses rising price pressures. Inflation expectations are moving higher which means the world’s most important central bank may struggle to continue arguing that they are well anchored.

The dollar is consolidating yesterday’s selloff while stock markets and bond markets have breathed a collective sigh of relief that inflation didn’t accelerate even further. Value sensitive sectors like materials, industrials and financials outperformed on the day pushing the Dow and S&P500 to fresh record high closes. European bourses had hit multi-year highs yesterday but have opened up mixed so far.

Oil rebounds

It was a volatile day in oil markets with prices moving down towards $69 and then up above $71 on various headlines. The US administration heaped pressure on OPEC and its allies to boost supply to tackle rising gasoline prices. The Biden Presidency wants to see Americans “have access to affordable and reliable energy…at the pump”. Of course interestingly, concerns over rising commodity prices are also being voiced by the Chinese authorities.

The current increase by OPEC+ agreed recently of 400k barrels per day is seemingly not enough. But given the uncertainty around the spread of the Delta variant, it seems unlikely that the Saudis and the oil-producing group will want to increase production just yet. The contradictory nature of Biden policies is also being questioned as it urges greener energy while asking foreign producers to open the taps to lower pump prices.

UK Q2 GDP in line

Hot off the press, second quarter UK GDP has just been released in line with the consensus at 4.8% q/q. Growth is expected to slow again this quarter due to the Delta variant putting the brakes on the economy. But economists hope that the UK should still return to pre-pandemic levels by the end of this year.

With the hawkish noises from the Bank of England last week contrasting heavily with the continued dovish stance of the ECB, EUR/GBP has pushed to new 18-month lows. Prices are now consolidating just below the 0.8471 level and bears expect to see more downside, especially as the ECB engineers a weaker currency. A soft weekly close may start to challenge the 2019 and 2020 lows at 0.8281 and below.  



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