Futures head lower after Fed minutes & ahead of EZ inflation – Daily Market Brief, August 18, 2022

The FOMC meeting minutes showed that the Fed intends to keep raising interest rates until inflation falls significantly. With no sign of a policy pivot, stocks trade lower & USD is rising.

·         AUD/USD falls after weak Australian jobs data

·         EUR/USD falls ahead of Eurozone inflation, which is expected to hit a record high of 8.9%

·         US jobless claims are set to continue climbing higher

Stocks in Europe closed in the red yesterday after UK inflation hit double digits for the first time in 40 years, lifted by food and fuel prices, and after Eurozone GDP was downwardly revised in the second quarter.

Wall Street also closed lower after mixed corporate earnings and weaker than expected retail sales raised questions over the health of the US economy and after the release of the minutes of the July meeting.

Fed minutes

The minutes from the meeting where the Fed hiked rates by 75 basis points showed that the Fed is not near a policy pivot. Policymakers agreed that interest rates should continue rising until inflation falls substantially towards the central bank’s 2% target level. The Fed didn’t provide specific guidance for future increases but would follow the data closely before making a decision. Any hopes of rate cuts in 2023 appear entirely misplaced.

The market still favors a 50 basis point hike in September, although that remains a close call. There is still a great deal of uncertainty over the size of the rate hike in September – 50 or 75 basis points. This uncertainty could keep markets trading in a tight range ahead of next week’s Jackson Hole meeting.

Australian jobs data

AUD/USD has had a tough week, underperforming its major peers. The pair tumbled at the start of the week amid rising concerns over slowing growth in China. The sell-off in the Aussie has continued after wages grew at a slower pace than forecast in the second quarter and after the July jobs report disappointed. The downbeat report showed that 40.9k jobs were lost last month, missing estimates of 25k job gains. Softer wages and lost jobs could dissuade the RBA from hiking rates aggressively in upcoming meetings. Meanwhile, the USD is benefitting from the hawkish Fed minutes. AUDUSD trades down 2.6% so far this week at 0.6930.

Eurozone inflation

Today European indices and US futures are trading mildly lower as attention shifts to Eurozone inflation and US jobless claims.

Eurozone inflation is expected to rise to a record 8.9% in July, up from 8.6%. This is the final inflation print ahead of the September 8th ECB monetary policy meeting so the data will be closely watched. If above forecast, inflation will pile pressure on the ECB to hike rates more aggressively. Despite the prospect of higher interest rates, the euro looks vulnerable amid a deepening EU energy crisis and growth risks. EUR/USD is falling back towards 1.0150.

After rising to a two-month high earlier in the week, the DAX closed 2% lower yesterday and is set to extend the selloff today.

US jobless claims

The recent US non-farm payroll data showed that the US jobs market was in good health even though jobless claims have been steadily climbing higher each week, hitting an 8-month high last week. The trend of rising initial jobless claims looks set to stay, with claims set to rise to 264k.

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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