Investors turn more hawkish amid another stubborn inflation report

Inflation remains a major concern for central banks and recent data highlights how far there is to go, something policymakers will be hoping changes very soon.

A major headache for the Bank of England

There’s no getting away from another rate hike from the BoE next month after inflation unexpectedly remained above 10% in March. This followed the labour market report on Tuesday which showed wages also remaining stubbornly higher, a combination that will make justifying not hiking very difficult for the central bank.

While inflation is still expected to fall sharply over the course of the year, likely beginning over the next couple of months, it won’t come soon enough to give the MPC something to point towards to warrant ending the tightening cycle.

The fact that the economy has also avoided a recession and could do so again this year could also support demand and cast doubt over the level of decline in inflation that was expected, supporting the case for more hikes. Markets are fully pricing in a hike in May with another then priced in for June and a final one – taking the base rate to 5% – before the end of the year. That may prove overly hawkish once inflation starts falling but at this point in time, it’s hard to argue against tightening continuing.

Oil testing post-OPEC+ gap open

Oil prices are off almost 2% today and earlier tested the gap open from a couple of weeks ago. That came on the back of the surprise weekend OPEC+ output cut which propelled the price back towards the highs of the previous few months, where it has since hovered around.

Today’s sell-off comes on the back of some selling pressure yesterday following the Chinese industrial production data and slightly more hawkish expectations on interest rates. In the UK that refers to the higher terminal rate we’re now seeing while elsewhere like the US, it’s fewer rate cuts later in the year. A significant break of $79 in WTI could be very interesting, with the previous Friday’s high a little below $76.

Gold corrects as investors become more hawkish on interest rates

Once again, gold’s foray above $2,000 was brief as sentiment in the markets shifted, rate expectations became more hawkish and profit-taking kicked in. That meant record highs weren’t tested on this occasion – although it wasn’t too far off – and we’re now seeing more of a corrective move in the yellow metal.

Notable support can be seen around $1,940-$1,960, with $1,900 then being the big test below that. A break of this could signify a broader trend shift and much more hawkish interest rate expectations.

Is bitcoin still correlated with other markets?

Bitcoin is very choppy at the start of the week, fluctuating above and below $30,000, a big psychological level it broke back above last week. There’s seemingly no loss of enthusiasm for cryptos despite changing dynamics elsewhere in the markets which suggests weakening correlations but that may change as the dust settles.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA