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The week ahead – UK’s inflation headache pressures BoE

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GBPUSD rallies on high rate expectations

Chart of GBPUSD

Cable inches higher as the Bank of England is expected to stay hawkish. As inflation in the UK remains above 8%, the highest among major economies and seems to be stickier than in the US or the euro bloc, the BoE is relatively far away from the end of the rate-tightening compared to its peers. Wages recorded their fastest growth over the three months to April, leaving policymakers little choice but to continue down the hike path. The market has priced in a quarter of a percentage point increase to 4.75% next week with more to come which could shore up the pound. 1.2300 is the closest support as the pair grinds towards 1.3000.

USDCHF slips as SNB to raise rate

Chart of USDCHF

The Swiss franc grinds higher as the market expects the Swiss National Bank to raise interest rates. Annual inflation in Switzerland fell to 2.2% last month, making it a rather enviable figure for most economies these days. Still ,according to Chairman Thomas Jordan, the SNB would be conservative in terms of price stability and strive to push inflation back into the 0-2% range target. Now that the US counterpart has lifted its feet off the pedal, even though temporarily, the Swissie might continue to appreciate as the rate differential narrows. 0.9100 is the first key resistance for the greenback with 0.8830 as a recent floor.

UKOIL slips over lack of demand catalyst

Chart of UKOIL

Brent crude struggles as a lack of growth catalyst weighs on global demand. OPEC+ supply cuts have offered limited support to the price, which suggests that the demand narrative remains a major driving force. A clouded economic outlook combined with central banks’ eagerness to pursue or restart their tightening puts pressure on the growth-sensitive commodity. OPEC has raised its forecast for Chinese consumption for the second half of this year, but a limited market reaction shows that traders shrugged off what appeared to be a thinly veiled attempt to shore up the price. 70.00 is a critical support and 80.00 the first resistance.

SPX 500 advances on Fed pause

US 500

The S&P 500 rallies as fears of recession dissipate despite the Fed’s hawkish tilt. Just like some other central banks e.g. the RBA and the BoC, it looks like the Fed has also adopted the ‘stop-and-go’ strategy to give the economy enough time to digest its aggressive quantitative tightening. A shift in rate expectations would be a major market driver as a slower decline in inflation, if confirmed by the next sets of data, could warrant another half of a percentage point by the end of this year, which would be at odds with lingering hopes of a rate cut. Until then, the pause is lifting the index towards 4500 with 4260 as the closest support.


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