Calm but for how long

Some calm appears to have returned to financial markets in early trade in Europe this morning but how long will it last?

While everyone will be hoping that the turmoil that swept through markets since Friday is dealt with and behind us, I’m not sure anyone can say with any confidence that this is the case and investors will remain very sensitive to ongoing developments.

What’s more, we’ve seen a dramatic repricing of interest rate expectations, to the extent that markets now price peak rates to be here or near and rate cuts this year to be highly likely. In much the same way that I wasn’t convinced by pricing in the aftermath of Powell’s appearances, barring much greater fallout in the financial system, I struggle to see expectations remaining so dovish.

The timing of today’s inflation data is therefore all the more intriguing as, what was meant to be the dominant driver this week has fallen down the pecking order. But to what extent isn’t clear. And depending on the outcome, it could either compound expectations or create an even greater headache for the Fed which will already be questioning whether a pause this month may be the best course of action.

Some good news for the BoE

The UK jobs data was largely in line with what markets were expecting and didn’t really shift the dial in any significant way. The unemployment rate didn’t tick higher as expected, remaining at 3.7%, but hourly earnings did soften to 5.7% including bonuses – from an upwardly revised 6% – while excluding bonuses they fell a little further to 6.5%.

All told, I don’t think either aspect of the report will fuel or ease concerns at the Bank of England about inflation and the path for interest rates. Meanwhile, markets are still pricing in a 25 basis point hike over the next couple of meetings and the pound is only marginally softer than it was pre-release. Focus now shifts to the budget tomorrow and whether the Chancellor will use the new-found fiscal headroom or save it for later.

For a look at all of today’s economic events, check out our economic calendar:

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam
Craig Erlam

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