18 May 2022 – Crude Oil Rising above $110

OVERVIEW

U.K. Inflation weighing on BOE

ECB might hike 50 basis points

Oil rise amid China COVID developments

FOREX

U.S. Dollar

The U.S. dollar hopped back on Wednesday, a day after its biggest daily loss in more than two months, as U.S. Federal Reserve chief Jerome Powell struck a more hawkish tone as the central bank battles to rein in surging inflation. The U.S. dollar index was up 0.3% at 103.59, after earlier touching a two-week low following Tuesday’s 0.9% drop.

Powell pledged that the U.S. central bank would ratchet up interest rates as high as needed, including taking rates above neutral, to kill a surge in inflation that he said threatened the foundation of the economy.

Euro

The euro slipped 0.3% to $1.0516, reversing an earlier rise to a one-week high. European Central Bank is expected to raise the interest rate by 50 basis points in the next meeting. Additionally, ECB policymaker Klaas Knot said a 50-basis point rate increase in July was possible if inflation broadens.

Similar data from the Eurozone is due later in the session and is expected to show CPI at 7.5% in April, increasing the likelihood of the European Central Bank hiking rates by 25 basis points in the summer.

Sterling Pound

Sterling fell 0.7% to $1.2406 as data showing British inflation surged 9% last month to its highest annual rate since 1982 piled pressure on policymakers to help households facing a worsening cost-of-living crisis.

Core inflation, which strips out volatile food and energy prices, also rose strongly, by 0.7%, as a reopening economy quickly ran into bottlenecks caused partly by supply chain problems stemming from the pandemic and partly by a skills shortage caused by the loss of European Union workers from the workforce. There was also evidence of plenty more inflation in the pipeline, with producer input prices rising another 1.1% after a 4.6% rise in March, while factory gate prices rose 2.3% on the month, taking the annual increase to 14%.

Australian dollar

The Australian dollar fell 0.3% to $0.70075 as Australian wage growth ticked up by only a fraction last quarter, leading investors to scale back bets on larger increases in interest rates. Figures from the Australian Bureau of Statistics on Wednesday showed its wage price index (WPI) rose 0.7% in the March quarter, missing forecasts for a 0.8% increase.

Indices

U.S. Indices

U.S. stock futures moved modestly higher on Tuesday evening after major benchmark indices rebounded from recent losses during regular trade, however, traders remain cautious of a potential recession after Federal Reserve Chair Jerome Powell noted at a Wall Street Journal conference on Tuesday that “there won’t be any hesitation” about raising rates until inflation is under control.

Dow Jones Futures and Nasdaq 100 Futures were up 0.1% apiece while S&P 500 Futures gained 0.2%. During Tuesday’s trading session, the Dow Jones Industrial Average jumped 431.17 points, or 1.34%, to 32,654.59, the S&P 500 added 2% to 4,088.85 and the NASDAQ Composite added 2.76% to 11,984.52. On the bond markets, United States 10-Year yields were at 2.995%. European Indices

Later in the session, the second estimate of Eurozone gross domestic product for the first quarter is expected to show modest 0.2% growth on the quarter, up 5.0% on the year.

European Indices

European stock markets rimmed lower Wednesday, struggling to maintain the week’s positive momentum as surging U.K. inflation raised concerns about interest rate rises and slowing growth.

Data out of the U.K. early Wednesday showed consumer inflation hitting a 40-year high, climbing 9.0% on the year in April, gaining 2.5% on the month, the biggest monthly increase since 1991. Deputy Governor Dave Ramsden said last week that the central bank will have to raise interest rates further to control surging prices, and there is a risk that the U.K.’s worst inflation crisis in decades will take longer to ease fully.

Similar data from the Eurozone is due later in the session and is expected to show CPI at 7.5% in April, increasing the likelihood of the European Central Bank hiking rates by 25 basis points in the summer. European Central Bank Governing Council member Klaas Knot, on Tuesday, became the first Eurozone official to suggest a possible half-point interest rate hike if inflation risks worsen, though he backs a smaller move for now.

The German DAX was valued 0.1% lower, and the CAC 40 in France fell 0.1%, while the FTSE 100 in U.K. dropped 0.1%.

Crude Oil

Oil prices rose on Wednesday on expectations that easing restrictions in China will boost demand. The market also saw support from rising supply concerns. Furthermore, Russian crude output in April fell by nearly 9% from the previous month.

Brent crude was up 1.1% at $113.17 a barrel, while U.S. West Texas Intermediate (WTI) crude climbed 1.5%, to $114.09 a barrel.

The European Union’s failure to persuade Hungary to lift its veto on a proposed embargo on Russian oil is adding price pressure. Additionally, the European Commission will on Wednesday unveil a 210-billion-euro plan for how Europe can end its reliance on Russian fossil fuels by 2027.