Growth optimism in Europe; US CPI awaited

Economic recovery optimism is overshadowing concerns of runaway inflation and helping European stocks pare some of the deep losses from the previous session.

Stocks tanked on Tuesday, experiencing the worst one-day sell-off so far this year as inflation fears got the better of the market. The sheer prospect of US inflation rising too quickly, prompting the Fed to step in and tighten policy, saw investors whip risk off the table around the world. The Fed implementing measures to tighten monetary policy could slow the growth outlook, unnerving the investors.

Today’s German inflation numbers have helped to calm fears ahead of the US consumer price index inflation data later today, coming in line with expectations. Even French inflation data was slightly short of forecasts.

The FTSE is outperforming its European peers as GDP data points to an economic turnaround. The British economy contracted -1.5% in the first three months of the year – better than the -1.7% forecast – as the economy battled lockdown restrictions and Brexit.

Delving deeper into the numbers, the monthly GDP for March showed a stronger-than-expected rebound in the economy as businesses prepared for the easing of lockdown restrictions and the opening of the economy. The March GDP MoM rose by 2.1%, ahead of the 1.3% forecast and well up from February’s 0.4%.

March’s economic expansion was the fastest pace seen since August 2020 and serves as solid evidence that UK economic recovery is moving in the right direction.

Looking ahead, US futures are trading lower for a third straight session as investors await today’s US CPI data. The equity market just can’t shake off these inflation jitters, which sent stocks to close firmly in the red again on Tuesday.

US CPI is expected to come in at 3.6% year-on-year in April, up from 2.6% in March. A higher-than-forecast read could prompt bets that the Fed will move sooner to tighten policy pulling stocks, particularly tech stocks, sharply lower.

US dollar shows few signs of inflation fears

The US dollar is edging higher, although it remains near recent lows ahead of the inflation release. While the equity markets have been showing signs of stress and are fretting over the Fed’s move to tighten policy, these fears are not being played out in the FX markets, with the US dollar hovering around two-month lows.

Fed speakers are remaining cool, which is keeping the US dollar calm even as high levels of volatility have been seen in the equity markets. Over the last few months, the Fed has reiterated many times that it needs to see a stronger recovery, particularly in the labour market, before it moves on policy.

The pound is showing resilience, holding USD1.4150 following stronger-than-forecast GDP data. Last weekend’s local election results were supportive of political stability, which boosted the pound earlier this week.

For a look at all of today’s economic events, please check out our economic calendar at www.marketpulse.com/economic-events/

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