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Investors Concerned over Fed's Reaction to the CPI Figures
11.08.2022

Traders and market participants continue to monitor the reaction of global assets to the release of the latest Consumer Price Index and the decline in US inflation. Inflation in the US has declined from 9.1% to 8.5% which, of course, is still higher than the regulators 2% - 2.5% inflation target. Economists predict the Fed’s reaction in terms of its monetary policy is likely to be the next market driver. For example, the market is now contemplating whether the Federal Open Market Committee (FOMC) will increase rates again by 75 basis points or if they will decrease the alteration down to 50 basis points.

In addition to the above, the market is also likely to pay strong attention to the economic activity such as the Gross Domestic Product (GDP) which is scheduled to be released later this month. If the inflation level continues to decline and the economy continues to contract, the market may indeed see a change in the Fed’s stance. However, comments from the Federal Reserve continue to reassure that these inflation levels require further alterations in the monetary policy.

EUR/USD

The EUR/USD pair continues to see strong price movement after the release of the US CPI figure. The price of the instrument started the day with downward movement, continuing the retracement which originally formed yesterday evening. However, momentum has picked up again after the opening of the European Session resulting in the exchange forming another bullish candlestick.

Even with gaining value against the USD as well as other minor currency pairs, it has been advised by most economists that the Euro is still at high risk and may potentially see another downward trend before the end of the year. Inflationary pressure within the Eurozone remains significant and still threatens to reduce demand and generally slow down the economy.

EURUSD - 11.08.2022.png EUR/USD 1-hour price chart on August 11th

Political parties within the German parliament continue to discuss how the government can support citizens struggling with the rise in prices, but have so far been unable to come to an agreed program. The discussion revolves around potentially introducing a project to increase the basic tax-free social benefit. Finance Minister Christian Lindner said that the German economy remains fragile and, if action is not taken within the coming months, up to 45 million citizens could see their economic situation deteriorate significantly. However, some political members and parties believe that the amount of assistance is insufficient, others believe it should be more targeted and affect only the needy segments of the population.

In addition to the above, investors continue to remain uncertain regarding the European energy supplies. Norway has recently hinted that it may potentially lower the exports of gas and oil to both the European Union and the UK. This would put further strain on an already tense sector, especially if the Eurozone proceeds with plans to cut Russian imports by a further 20% in the new year.

Crude Oil

The price of Crude Oil increased above $92 for the first time in over a week. Investors continue to see the level of supply at risk, specifically during the coming autumn and winter months.

USOUSD - 11.08.2022.png Crude Oil 1-hour price chart on August 11th

One of the latest developments in the market revolves around the Russian company Transneft which announced plans to re-open the Druzhba oil pipeline. This pipeline will allow European consumers to receive oil in full again. This could have resulted in increased supply, but of course European countries plan to cut the supply from Russia which is a positive for the price and bullish traders.

On the other hand, US Oil inventories rose by 5.45 million barrels over the past week, compared to previous predictions of 0.073 million barrels. However, gasoline inventories fell well below market expectations. It has also been confirmed that consumers have become more active in buying gasoline, especially now that prices have decreased over the past month. US businesses expect energy consumption to rise from the fall season, so more resources will be required to produce it.

As demand remains high and supply is still a concern due to uncertainty and disruptions, it is predicted by most of the commodity's market participants that the price of oil will increase above $100 in September-October.

Key Takeaways

  • The Euro increases in value but many expect that the trend won’t last.
  • The German parliament cannot agree on support for citizens struggling with inflation.
  • European oil and gas support is still a major concern for investors.
  • Norway may be forced to lower energy exports to the EU and UK.
  • Druzhba Oil Pipeline reopens.
  • Demand for petrol increases as petrol prices fall.
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