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Record High Inflation Rate in The UK. A Bubble Ready to Burst?
17.08.2022

Today is proving to be a busy day for the markets with a lot of volatility and plenty of economic news scheduled to be released throughout the day. The UK, Australia, and New Zealand have all already got the ball rolling in terms of economic data.

One of the most shocking pieces of news is again related to UK inflation figures. This morning, the UK released its Consumer Price Index (CPI) which brought the country’s inflation rate above 10% - much higher than predicted by the market. Additionally, New Zealand’s regulator increased interest rates by a further 50 basis points, as expected by the market, while Australia’s Wage Price Index remained at 0.7%, which is slightly lower than predicted by the market.

However, the stock market showed little volatility as investors are awaiting the Fed’s Meeting Minutes which are scheduled for this evening. Investors are hoping the report will indicate a lower rate hike or possibly a “hike break'' at some point later this year.

GBP/USD

The price of the Pound against the US Dollar has seen a slight change since the opening of the US trading session yesterday. The US Dollar declined against most of its competitors. The movement of the currency pair has increased by 0.64% since the trend was formed yesterday afternoon. The price has seen increased volatility over the past hour after the release of this morning’s UK CPI figure.

The medium-term price movement remains within the range of 1.2039 to 1.2278. The current upward direction has been triggered after the price, again, reached the support level of the price range which has been activated on 4 occasions since the 1st of the month.

GBPUSD - 17.08.2022.png GBP/USD 8-hour price chart on August 17th.

Yesterday, the UK released its latest unemployment rates for June which remained the same at 3.8%, but employment change increased only by 160,000. This is much lower than the forecasts of 256,000 and even lower than the 296,000 which was confirmed in May. At the same time, the level of wages continues to grow, which can be seen as a positive but may also contribute to high levels of inflation. However, it should be noted that the inflation rate is much higher than wage growth resulting in the real wage growth figure remaining in the minus.

The most influential piece of news today is likely to be FOMC’s Meeting Minutes Report which may contain comments on the latest increase in interest rates. Not only does the document have a major effect on the market, but it also contains indications regarding further actions by the financial regulator.

Yesterday afternoon, Goldman Sachs analysts advised that they believe the decisions of the US Fed may be justified and not plunge the economy into a recession. Seems as though there are fewer and fewer chances of this not happening. However, they also advised that high inflation would be a greater risk to the economy and could result in a harsher recession.

Crude Oil

Crude oil has seen two major price movements since yesterday afternoon. Currently, the stronger of the two remains the bearish trend which brought the price to a new 6-month low. After the price reached a low of $85.37, the price formed a retracement bringing the price back up to $86.79. The current price is still lower than the previous day’s price range with the retracement measuring 57%, compared to the previous impulse wave. The price movement has slightly declined since the opening of the European Session, which, of course, traders will continue to monitor.

The price of crude oil continues to interest traders as it is reaching the lowest level in 6 months. This morning, though, it has slightly increased throughout the Asian Session. The asset has shown signs of price action in both directions since Monday, and traders are hoping to see a trend form and maintain momentum.

USOUSD - 17.08.2022.png Crude Oil 1-hour price chart on August 17th.

Generally speaking, the price of oil is influenced by two opposing factors. Investors are currently fearful regarding the level of demand over the coming months as many economies show signs of decline or at least stagnation. These include the UK, US, EU, and China (the largest importer of oil). A recession could, of course, put significant pressure on the level of demand. It is for this reason that the price has declined over the past few months alongside a strong dollar, higher supply, and technical influences.

On the other hand, the price may be supported by hopes that the difficult economic situation will prompt the Chinese authorities to introduce new incentives that will revive the industry and demand. Chinese Premier Li Keqiang has already promised such measures and is pressuring provinces to proceed with developing fiscal support plans. Of course, China and the US will continue to play a major role on the demand side of the pricing.

Key Takeaways:

  • UK inflation hits a new high and further pressures the economy.
  • Markets await the Fed’s Meeting Minutes.
  • Crude Oil hits a new 6-month low.
  • The Chinese Premier has promised fiscal support to revive the economy.
  • Goldman Sachs advises that the US economy is at high risk.
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