Hot US inflation data injects some life into markets

Investors who have been craving for some volatility this afternoon had their wishes fulfilled following the May inflation report that showed prices rising in the United States at their fastest rate since 2008.

The consumer price index (CPI) jumped to 5% year-on-year, up from 4.2% in April and topping the 4.7% forecast. Core inflation, which strips out volatile items like food and energy rose 3.8% annually, its biggest increase since 1998. This report will most likely fuel concerns over rising inflationary pressures in the United States as the economy bounces back from the pandemic. While the hot inflation data may not be enough to force the Fed to make any policy moves anytime soon, it may prompt the central bank to think twice about their “transitory” mantra while fueling speculation over official taper discussions.

Looking at the reaction across markets, US Treasury yields spiked above 1.53%, US stocks opened higher while the dollar whipsawed.

In other news, US jobless claims fell to 376,000 last week which was above the median economist estimate but the lowest level since 13 March last year. Given how the Federal Reserve has made it clear to markets that employment is a key component in its mandate, the improving jobless claims could add to the growing list of factors that may bring more hawks to the policy discussion table.

Looking at the technical picture, the Dollar Index has found some support above the 90.00 level. A daily close above this point could open the doors towards 90.45. Alternatively, a decline back below 90.00 may inspire a move towards 89.52.

ECB leaves rates and stimulus unchanged

As widely expected, the European Central Bank kept its interest rates and stimulus program unchanged despite rising inflation across the bloc.

In its statement, the central bank said it would continue with its mammoth €1.85 trillion pandemic emergency purchase programme (PEPP) until at least March 2022 or until its judges that the Covid-19 crisis phase is over. The council stated that the pace of the PEPP purchases would be kept unchanged at a “significantly higher pace during the first months of the year”.

When it came to the staff projections and post-meeting press conference, Christine Lagarde sounded optimistic over the economic outlook. The growth forecasts for 2021 and 2022 were raised with GDP seen expanding 4.6% this year and 4.7% in 2022. In regard to inflation, the forecasts were increased to 1.9% in 2021 from 1.5% and 1.5% in 2022 from 1.2%. This means the ECB still sees current inflation as being temporary.

All in all, Lagarde struck an upbeat tone on economic growth and saw broadly balanced risks and stable financial conditions Despite the rosier outlook, the ECB maintained a safe distance from any mention of taper talks. The euro has been choppy but has found a bid above 1.2180 since the end of the press conference.

Commodity spotlight: Gold

Gold was injected with volatility on Thursday after the US inflation data exceeded market expectations. The precious metal appreciated as further signs of inflationary pressures boosted appetite for the commodity which is seen as a hedge against inflation. However, upside gains may be capped if inflation fears send US Treasury yields climbing and boost the dollar.

Lagging indicators remain in favour of the bulls with the MACD trading above the zero level while the 50-day Simple Moving Average has crossed above the 100-day. Gold bugs remain in the driving seat above the $1855 support level with $1916 acting as the first level of interest if $1900 proves to be weak resistance. Beyond $1916, gold has the potential to test $1927 and the year-to-date high at $1959.

Alternatively, sustained weakness below $1900 could trigger a decline back towards $1870, $1855 and $1842.