ECB signal July hike, Gold at 1850 before US CPI data – Daily Market Brief, June 10, 2022

After losses on Wall Street, European stocks are heading for a weaker start, extending the selloff from the previous session.

·         Global growth concerns and aggressive central bank fears hurt risk sentiment

·         US CPI is expected to inch lower to 8.2% YoY and could provide clues to the Fed’s next steps

·         Gold trades quietly below $1850 ahead of inflation data which could be key to the next move

Stocks across Europe plunged yesterday as inflation concerns and tighter monetary policy fears knocked risk sentiment and overwhelmed traders.

The ECB, as expected, left rates on hold but pre-committed to a 25 basis point interest rate rise in July and potentially a 50 basis point rate hike in September. The hawkish turn came following a surprise outsized RBA hike earlier in the week, highlighting the more aggressive stance that central banks are adopting in the face of surging inflation.

The ECB slashed growth forecasts for the year to 2.8%, down from 3.7%, and raised the inflation outlook to 6.8% in 2022, up from 5.1% in the March projections.

The gloomier outlook from the ECB matches those from the OECD and the World Bank earlier in the week, suggesting that Europe and the UK are facing stagflation head-on. Furthermore, with rising prices in the energy complex, and food prices showing no signs of easing, it still seems way too premature to be talking about passing peak inflation in Europe.

The DAX closed 1.7% lower yesterday and is expected to open -0.7% lower today. The FTSE lost 1.5% and is set to open -0.7% lower.

The EUR/USD fell 1%, tumbling below 1.07 to a low of 1.0610. The pair is inching higher ahead of the European open, but its direction from here depends on US inflation data.

US CPI

Today’s US CPI data will provide clues as to whether peak inflation is passing in the US. Headline CPI fell from 8.5% in March to 8.3% in April and is expected to tick lower to 8.2% in May. Core inflation which removes the more volatile items such as food and fuel, fell from 6.6% in March to 6.2% in April and is expected to be 5.9% in March.

Inflation appears to be moving in the right direction but at a very slow pace. The data will likely provide further clues as to what the Fed will do next with monetary policy. So far, a 50-basis point rate hike in June and July is a given. But what happens after that is less clear. Should CPI remain elevated, expectations of more outsized rate hikes across the remainder of the year could drag stocks lower and boost the USD.

US futures are rising modestly in early trade, while the USD is easing off a three-week high.

Gold

Gold has been trading quietly across the week ahead of today’s inflation print. On the one hand, the risk-off trade has supported the precious metal. However, the strong USD and rising treasury yields have pressurized gold.  Hotter than expected, inflation could flag larger and faster rate hikes from the Fed and pull gold lower. Meanwhile, gold could rebound on the back of a surprise fall in inflation, taking pressure off the Fed.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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