Inflation spooks the market, Powell’s testimony in focus

European stocks traded broadly lower on Wednesday amid rising concerns over surging global inflation.

An unexpected jump in US inflation to 5.4% is making it increasingly difficult for the Federal Reserve to defend its dovish monetary policy stance. While the Fed adopted a hawkish shift towards two interest rate rises in 2023, the market now doesn’t think that’s gone far enough. Rising expectations that the Fed could tighten monetary policy sooner than previously expected hit demand for stocks in the US and Asia and is weighing on demand in Europe.

Blowout inflation numbers have just kept on coming. UK CPI surged to 2.5% YoY in June, up from 2.1% and ahead of the 2.2% forecast. As inflation keeps rising, more questions are being asked over how transitory this spike actually is. Inflation concerns have been hovering over the financial markets for some time. Persistently higher prints are only adding to the unease.

The jump in inflation boosted the pound, pulling the internationally-focused FTSE lower. The UK index is underperforming its European peers.

Looking ahead, US futures are pointing to a mixed start, with tech stocks once again trumping value. Nasdaq futures are on the rise, while Dow futures look to extend losses.

Federal Reserve Chair Jerome Powell is due to testify before Congress in a semi-annual hearing. Needless to say, the markets will be watching closely to see if the latest CPI print has adjusted the Fed’s thinking regarding elevated inflation being transitory. Any hint that the Fed’s position is wavering could see stocks take another leg lower.

The US earning season continues with Bank of America under the spotlight, with Citigroup and Wells Fargo also due to report ahead of the opening bell.

FX – USD hovers around three-month high, GBP recovers

The US dollar hit a three-month high following blowout inflation data. For now, the greenback is ticking mildly lower as investors wait to hear more from Fed Chair Jerome Powell. Powell has repeatedly stated that he considers the spike in inflation to be transitory. Any deviance from this well-rehearsed line could send the greenback to fresh multi-month highs.

The pound is putting in a solid performance against the US dollar after stronger-than-expected inflation data. GBP/USD is recovering from losses in the previous session and is hovering around 1.3850. Whether the pair can head back towards 1.39 depends largely on what Fed Chair Powell has to say.

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Sophie Griffiths
Sophie Griffiths is a market analyst with OANDA, focusing on the UK and Europe. With almost 15 years of experience, she brings with her a deep-seated understanding of the financial markets, providing timely and relevant fundamental analysis across a broad range of asset classes.