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Europe set for a positive start, as Asia markets rebound

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In the absence of US markets yesterday European markets enjoyed a positive session yesterday, although the gains are still some way off reversing the big losses seen on Thursday last week, when markets were still absorbing the after effects of large rate hikes from the US Federal Reserve and the Swiss National Bank.

Yesterday’s gains came despite rising concerns over a global economic slowdown, a fear that has been reflected in weakness in base metals prices, with copper prices sliding to one-year lows.

An increasingly hawkish tone from Federal Reserve officials appears to be prompting concerns about global growth after Fed governor Christopher Waller emphasised a determination on the part of the US central bank to get inflation down in a tone that suggested they’d risk a recession to do so.

Iron ore prices also came under pressure on concerns over falling demand out of China, falling to three-month lows, while Friday’s sharp slide in oil prices is also raising concern about a sharp fall in demand.

The pound gained a degree of support yesterday after external MPC member Catherine Mann said the central bank ought to consider raising interest rates faster in order to counteract the inflationary effects of the recent decline in the currency we’ve seen in the past 12 months.

Last week she was one of the 3 MPC members who voted for a 50bps rate hike, although she was keen to stress that her remarks should not be taken as her wanting to defend the value of the pound, which seems an odd clarification given that was her reasoning for wanting to raise rates by 50bps.

One of the main reasons why inflation has become such a problem has been a degree of procrastination on the part of the central bank over the past few months when it comes to making decisions on how quickly to start raising rates, as well as a complete inability to arrive at an accurate assessment of how quickly inflation has become embedded in the UK economy.  

Back at the end of November last year Catherine Mann herself was quoted as saying that it was too early to talk about rate hike timings, much less by how much, only to do just that 16 days later when the Bank of England raised rates by 15bps to 0.25%.

In February the Bank of England raised its 2022 inflation forecast from 4.6% to 5.7%, with an expectation that it would peak at 7.25%. Yet here we are just over 4 months later, and the central bank is projecting a peak figure closer to 11%, its 8th inflation forecast this year.

Even without the unforeseen fallout from the Russian invasion of Ukraine, this is a huge failure on the part of the MPC, only being made worse by hesitancy on their part. The pound has remained resilient overnight despite the damage today’s countrywide rail strike will do to the UK economy as the entire rail network grinds to a halt.

To be fair to the Bank of England they haven’t been alone and haven’t been the worst culprits with the ECB even further behind the curve, along with the Reserve Bank of Australia.

In comments early this morning RBA governor Philip Lowe appeared to be setting the scene for another move on interest rates two weeks from now, having surprised the markets earlier this month with a 50bps move.

He went on to say he expected CPI to peak at 7% by the end of the year, and that the RBA would do whatever it takes to return inflation to 2% to 3%. He went on to say that while Australians should prepare for more rate rises, the rate hike trajectory projected by markets was too aggressive and wasn’t very likely.

Asia markets have picked up where markets in Europe left off, drifting higher, and along with US future today’s European open looks set to be a positive one, as US markets return later today.

EUR/USD – last week’s failure to break below the support at 1.0340/50 keeps the prospect of a rebound towards the 1.0800 area. We initially need to see a move above 1.0600, as well as trend line resistance from the highs this year, which comes in at 1.0680. Below 1.0330 targets parity.

GBP/USD – having failed to push below the 1.1950 area last week, we could see a rebound towards 1.2630 We need to push above the 1.2450 area for this to unfold. Below 1.1950 targets the 1.1500 area.

EUR/GBP – currently holding above trend line support from the recent lows in April at 0.8520. The current rebound needs to overcome the 0.8630 area. A break below 0.8500 targets the 0.8420 area and 200-day MA.  

USD/JPY – still have resistance at the previous peaks at 135.60. While below the risk is for a return to the 132.00 area. Above 135.70 targets the 137.00 area.

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