Andrew Bailey, the governor of the Bank of England (BoE), stated today, following the announcement of the recent rate hike, that inflation is expected to climb over 9% in the second quarter of 2022 and peak at a little more than 10% in the fourth quarter. The primary reason for this would be projected higher energy costs. The central projection assumes that global commodity prices will not rise anymore, global bottlenecks within supply chain disruptions will ease over time, and weaker demand growth and building excess supplies will lead domestic inflationary pressures to subside. According to the Bank of England, unemployment will drop more in the short term but will jump to 5.5% after three years due to a sharp drop in demand.
The BoE’s rate hikes since December 2021 have not done anything to tame inflation and have not in any way supported the pound versus a basket of other currencies. The GBPUSD is precipitously falling towards the March 2020 lows as the US dollar continues to gain against a basket of major currencies. The rate hike today by the BoE was seen to be a dovish rate hike, as the uncertainties from the war in Russia keep the bank guessing as to when the energy prices will come down.
The 4-week average in US jobless claims has now seen a month’s worth of reversal from the lows we saw at the beginning of April 2022. The number of seasonally adjusted initial jobless claims in the United States increased by 19,000 to 200K. With price stability the biggest worry for the Fed, the last thing they need is for the jobs markets to also come unstuck as their dual mandate is to keep prices stable and encourage maximum employment.
The TLT which is a 20-year Bond ETF keeps dropping, reflecting the rising yields and also continued perception that the Fed will raise further. The peak in the bond market before this drop came just before the Fed announced that they would reverse monetary policy, so I am assuming this keeps coming lower week on week, until we get to the point where the Fed ease off on the rate hike cycle.
In today’s OPEC+ meeting, the group announced an increase in production of 432,000 barrels per day (bpd). “Continued oil market fundamentals and the outlook point to a balanced market,” and they pointed out that the COVID-19 pandemic and geopolitical factors continue to affect the market. Even though the members are calling for a rate increase in production, there are still supply concerns as they do not all meet supply quotas. As a result, the cost of energy has risen yet again.
The EURUSD had been falling to sweep the lows from yesterday’s m30 candle formed at the Fed’s rate hike announcement. The move to sweep the liquidity had a catalyst from the ECB when across the newswires came a quote from ECB’s Rehn stating the bank should increase rates in July by 0.25%. This was later backed up by ECB’s Holzmann who said the ECB is planning to raise rates. With discussion and action to happen possibly in June. The weekly EURUSD shows a market in a down trend and unless we can close firmly above 1.06355 I am expecting a further decline to 1.0400.