Global Inflation Pressures Build up as oil Braces for a Breakout of key Technical Level

40558 global inflation pressures build up as oil braces for a breakout of key technical level

The RBA surprised markets on the meeting today delivering a hawkish 50 bp rate hike. Consensus forecast was a 25 bp move, swap markets priced in a bit more aggressive move of 40 bp. The RBA decided to take decisive action against inflation, which accelerated to 5.1% YoY according to the latest data, while consumption data and pace of construction growth in the country also allowed for a quick normalization of monetary policy.The Australian dollar behaved rather unexpectedly after the meeting: having jumped to 0.7250 after the meeting, AUDUSD went into decline and returned to the levels that preceded the meeting:This could happen for several reasons, namely: The rate differential (which determines carry trade flows) played a smaller role in 2022, short-term movements in the pair showed a greater dependence on the dynamics of the local stock market and abroad; Without clear signs of economic recovery in the main trading partner, China, traders are likely to demand a premium in AUD for this risk.The dollar strengthened sharply on Monday amid a rapid rise in Treasury yields. 10-year Treasury bonds are already offering yields of over 3%, yesterday’s high was 3.05%:The Japanese yen lost the most among the currencies of the G10 countries, which fell by 1.8% against the dollar during the day, to the lowest level since April 2002. The USDJPY rate tested the level of 133.Bond yields are rising as speculation that the Fed will slow down its policy tightening in September becomes less and less plausible. The US economy continues to show gains including stable consumption levels as well as good employment growth. The latest NFP report exceeded expectations with almost 400K job growth.In European sovereign debt markets, pressure is mounting on the ECB to speed up the process of policy normalization. This can be seen in the behavior of European bond yields, with 10-year German bonds offering 1.3% YTM (the highest since May 2014), while Italian bonds with the same maturity are trading at a yield of 3.4%, which has not happened since the end of 2018. The BoFA expects a cumulative ECB rate hike of 150bp by the end of this year, with two increases of 50bp each taking place in July and September. Such expectations contain the fall of EURUSD; however, it is clear that the market could be demanding too much from the ECB now, and on Thursday the regulator may disappoint, announcing a moderate pace of rate hikes. In this case, EURUSD is likely to rush to support at 1.05.Three major investment banks Goldman, Citi, Barclays revised their forecasts for oil prices in the third and fourth quarters of this year upwards. Goldman expects prices to rise to $140 in the summer, as rebalancing is slow at current price levels, and a seasonal increase in fuel demand is coming. Technical analysis says about consolidation around $120 per barrel before a possible breakout:It is very likely that against this backdrop we will see a new round of depreciation of European currencies, as hawkish actions by the BoE or the ECB may increase risk of stagflation, while attempts to keep rates low will likely fuel inflation further, which will worsen real yield outlook and force investors to reduce exposure to European assets.

Source: Tickmill

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