European markets are set for a weaker start, extending losses from the previous week and following steep declines on Wall Street.
· Inflation fears hit risk sentiment after Friday’s US CPI data
· UK GDP unexpectedly contracts -0.3% MoM in April pulling FTSE & GBP lower
· USDJPY rises over 135.00 to a fresh 2-decade high ahead of the FOMC later in the week
Fears over surging inflation ramped up at the end of last week. US CPI data unexpectedly rose to 8.6% YoY, up from 8.3%. The data wiped out optimism that peak inflation had passed and prompted fears that inflation could not only continue rising but could stay elevated for much longer than initially expected.
Fears over inflation are being reflected in central bank actions and guidance. The RBA surprised the market with an outsized rate hike last week, and even the usually dovish ECB hinted toward a 50-basis point rate hike in September.
Central banks will remain very much in focus this week, with the FOMC, BoE, SNB, and BoJ all set to announce rate decisions. With US inflation remaining stubbornly high, speculation is rising that the Fed could hike rates by 75 basis points and the chances of the Fed pausing the hiking cycle in September is now unlikely. Stocks on Wall Street booked their largest falls since early January, while in Europe, the FTSE and the DAX booked the biggest weekly decline since January.
Heading towards the open, the DAX is pointing to a drop of 1.5%, and the FTSE to a 0.9% decline following steep losses in Asia and dismal UK GDP data. In addition to inflation fears, COVID warnings from China added to global growth concerns.
UK GDP
UK GDP figures have hit risk sentiment further. The UK economy unexpectedly contracted in April on a monthly basis by -0.3%, after contracting -0.1% in March MoM and defying forecasts of a 0.2% increase in activity.
The data comes following a stark warning from the OECD last week that the UK will experience the slowest growth of G7 nations and also puts the BoE in a very tough spot ahead of the interest rate announcement on Thursday. Not only is inflation rising faster than expected, but growth is also slowing faster, making stagflation fears very real.
The FTSE trades at a three-week low. GBP/USD also trades under pressure below 1.23 at a monthly low.
USD/JPY
USD/JPY was the top-performing FX pair last week, rallying 1.7%, adding to gains of 1.9% the week before. Central bank divergence boosted the pair, which rose above 135.00 to a fresh 2-decade high in early trade today.
USD remains king in the FX markets on expectations that the Fed will act more aggressively to rein in 4 decade-high inflation. Meanwhile, the BoJ shows no sign of tightening monetary policy.
Looking ahead, the vice-Chair of the Federal Reserve, Lael Brainard, is due to speak. Investors will be watching closely for clues as to the Fed’s next move.
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