Most of the headlines were around the speaking events that the Fed members were attending. Though nothing fundamentally has changed in their rhetoric. The US indices are remaining bid but we’re not going to get a multi-point percentage point increase today. Tomorrow is a busier day with European data in the morning, so hopefully, the markets move more then.
The FTSE 100 index closed at 7305 at the London close today, after a sideways day to start the week. The Bank of England left interest rates unchanged last week, which destroyed the reputation of the central bank as a reliable source of forward guidance and removed all demand for the pound towards the end of last week. Today Bank of England Governor Bailey was scheduled to talk at a virtual citizens panel, but no news came across the wires. Leaving the GBPUSD to be pushed around by the US dollar as several FOMC members were speaking at different times throughout the day. The pound caught a bid but has so far not found its way back up to the 1.3600 level which is likely to act as resistance.
The UK 100 was also under pressure as the equity markets were generally subdued, though the US indices were all higher on the day at the time of writing. Nasdaq especially has found it hard to make progress after Elon Musk tweeted, he would sell 10% of his shares in an effort to pay some taxes, which put pressure on Tesla
Expectations for rate hikes were signalled to come in the coming months from the Bank of England but the framework was pretty much laid out by the others. As long as labour markets return to some level of maximum employment and inflation is persistently above 2%, rate hikes can start. In the meantime, investors await the UK preliminary estimate of third-quarter GDP growth next Thursday, which is expected to show GDP growth slowing to 1.5% from the previous quarter amid ongoing supply chain issues.
The forex heatmap has changed its profile since the start of the London session and is fairly mixed. The New Zealand dollar is still showing the strongest relative strength and the US dollar along with the Swiss franc have been the weakest pairs.
Gold is moving higher as benchmark yields generally drift lower, meaning that the real yields and inflation-adjusted TIPS are all weakening and in most cases are now negative.
The graph from FRED above shows the closing prices of spot Gold versus the 10-Year TIPS and they are currently running inverse to each other. The lower these yields go the higher the precious metals are likely to go. Today’s US consumer inflation expectations data showed consumers are more worried about rising inflation.
Inflation is bad for the US dollar but great for anyone who is heavily in debt if the central banks don’t set interest rates higher. Consumers are seeing some wage growth and they are also able to pay for the debt burden they currently have, so the Fed is obviously not convincing them yet that the inflation is transitory.
The GBPNZD trade that was looking like an aggressive breakout this morning, actually made its way back to 50% of the Asia-Pac range where it found resistance from the Friday lows.
Assuming these levels hold at or around 1.89340, I am still looking for a move lower to 1.8750 and 1.8650 in the coming days.