The FP Markets research team produce First Light News during the early hours of the European session, ensuring traders and investors have the news needed to begin their day.

Macro Wrap and Outlook

Everyone was waiting for the latest US inflation data yesterday. Headline US annual inflation for April came in a touch under the median consensus (5.0%) at 4.9%—this is the first time in 2 years that we have seen the annual inflation rate south of 5.0%. The forecast range heading into the event was between a high of 5.2% and a low of 4.8%. Food prices came in flat between March and April, displaying no change; energy, nevertheless, did increase by +0.6%, and shelter increased by +0.4%. While April marks the tenth consecutive month that headline inflation has cooled, it is still far above the Fed’s inflation target of 2.0%.

Core inflation—which strips out more volatile components such as food and energy costs—remains stubborn (sticky) at 5.5% in April, 0.1 percentage points down from March’s 5.6% reading and came in line with economists’ expectations. On a month-over-month basis, inflation increased 0.4%, up 0.3 percentage points from March’s 0.1% rate. Core month-over-month inflation for April matched March at 0.4%.

What does this mean for the Fed? Well, Fed’s Powell made it clear that the Fed is data-dependent, and inflation is clearly a noteworthy print. However, this does not mean the FOMC will press that pause button in June, despite markets pricing in a 90% probability of leaving rates unchanged. Core inflation remains a sticking point, largely unmoved since the beginning of this year.

Going forward, the Bank of England (BoE) is taking centre stage today at 12 pm GMT+1, poised to deliver a twelfth consecutive rate hike that would pull the Bank Rate to 4.5%. A rate hike today would also mark a whopping 440 basis points of tightening since December 2021. Headline inflation remained in double-digits at 10.1% in March (underpinned by high food and energy prices), along with strong wage data, supporting the likelihood of another rate increase today.

Markets have all but fully priced in a 25 basis-point increase, and the majority of forecasts expect a 7-2 split vote in the 25 basis-point decision. This means a 25 basis-point hike today could see an initial sell-off emerge in GBP/USD from those who bought into the event.

In addition to the above, we will likely see the central bank revise its projections, particularly upgrading its growth and inflation forecasts.

Markets

The reaction to the latest US CPI data watched a spike higher in EUR/USD unfold, a drop in the US Dollar Index, spot gold also caught a bid, and US Treasury yields dropped heavily across the curve. The latest CPI print is likely to weigh on the buck going forward, in line with the technical view demonstrated here as the Dollar Index eyes those April lows of 100.79.

GBP/USD is a key market today; the prospect of additional rate hikes has kept sterling bid against its US counterpart. This week we have seen the currency pair refresh YTD peaks at $1.2680, but the unit faces some notable technical headwinds: weekly trendline resistance taken from the high $1.4250, together with daily resistance close by at $1.2638.

(Trading View)

Aside from the Dow Jones Industrial Average, Wednesday observed a rally across all major US equity indices. Bolstered by gains in technology stocks (+1.2%), real estate stocks (+0.9%) and utility stocks (+0.9%), the S&P 500 rose 18 points (+0.5%) to 4,137, the Nasdaq 100 jumped 146 points (+1.1%) to 13,347, and the Russell 2000 added 12 points (+0.7%) to 1,761, while the Dow Jones Industrial Average declined 30 points (-0.1%) to 33,531.

European indices ended largely in negative territory, yet a positive tone is seen across most European equity index futures markets ahead of the cash open. The FTSE 100 is of particular interest today ahead of the BoE release. Current action has the index testing the mettle of daily support between 7,676 and 7,730, following price action topping out around 7,938 on 21 April.

Overnight, Asia Pac equity indices were largely lower on the day. Early hours also saw inflation data from China; consumer prices rose 0.1% in April (year over year), marking the slowest rate increase in two years. Month-over-month, however, consumer prices declined 0.1%. Year over year, core inflation remained at 0.7%, and month over month, we saw a rise of 0.1%.

Headline Events for the Day Ahead:

Bank of England (BoE) Interest Rate Decision at 12:00 pm GMT+1 (Expected to Raise by 25bps).

Month-Over-Month US Producer Price Index (PPI) for April at 1:30 pm GMT+1 (Expected: 0.3%; Previous: -0.5%).

Year-Over-Year US Producer Price Index (PPI) for April at 1:30 pm GMT+1 (Expected: 2.4%; Previous: 2.7%).

US Initial Jobless Claims for the Week Ending 6 May at 1:30 pm GMT+1 (Expected: 245,000; Previous: 242,000).

Thanks for reading. Have a great day!

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