Charts Of The Day: ECB & US Inflation Special

Market Analysis / 4 Min Read
Milan Cutkovic / 11 Jun 2021

Highlights:

  • Despite the muted market reaction, the impact of the ECB meeting and US inflation numbers should not be underestimated
  • CPI figures deliver an upside surprise to cause further unease amongst investors who fear a Fed rate hike
  • Tapering talk could weigh on equity markets – especially the tech sector
  • Inflation fears should keep the demand for gold stable
  • European Central Bank made no changes to its monetary policy, maintaining its dovish stance

Today´s events – the ECB meeting and the much-anticipated US inflation numbers – were supposed to be the highlight of the trading week. Despite the muted market reaction, the impact of these two events should not be underestimated. In this article, we will take a look at what happened today and how it could influence global markets.

US inflations concerns will persist

The CPI figures for May arrived at 5.0% year-on-year (vs. 4.7 % expected) and 0.6% month-on-month (vs 0.6% expected) – another upside surprise that is likely to cause further unease amongst investors who fear an early rate hike by the Federal Reserve. Considering the recent economic data, it is difficult to see how the central bank could maintain its ultra-loose monetary policy until 2024.

The Fed is maintaining their dovish stance and see the inflationary effects as temporary – for now. The US economy is booming following massive stimulus programs, and the risk of it running hot in the near-term is rising. Investors are therefore increasingly concerned that the US central bank could start talking about tapering asset purchases as early as this summer.

This would weigh on equity markets, especially the technology sector. Stocks have seen a significant bounce back following the pandemic, driven by massive stimulus measures by governments and central banks worldwide. Should market participants see the Fed cutting back too early on this, another sell-off would seem inevitable, and growth stocks could see the biggest losses. In the coming days, traders will keep a close eye on the bond market for further clues. The yield on 10-year Treasuries was little changed after the CPI data was released, but volatility is likely to pick up in the near-term.

Meanwhile, inflation fears should keep the demand for Gold stable. The precious metal has extended gains in the past few months, although the rising US Dollar caused some headwinds. Traders might look at the Gold cross pairs instead, with XAU/EUR and XAU/AUD becoming increasingly attractive – especially if market sentiment turns sour.

ECB maintains dovish stance

The European Central Bank made no changes to its monetary policy, maintaining its dovish stance. There were hardly any surprises, but investors were relieved that ECB members refrained from hints on future tapering.

The central bank acknowledged that the economy is gaining momentum and revised both growth and inflation forecasts higher. Nevertheless, it still highlighted that it sees the current inflationary pressures as temporary, therefore showed no intention of starting any taper talks soon.

It will be easier for the ECB to maintain its dovish stance, as the Euro Zone recovered slower from the recent crisis than the United States; this could give European equities a boost and an advantage over its US counterparts. Furthermore, European stock markets are more tilted toward value stocks, which works in their favor in the current market conditions.

Meanwhile, pressure on the Euro could increase in the near-term. A break below 1.21 support in EUR/USD would pave the way for a test of the psychologically important 1.20 level. A daily close below this level could spell trouble for the currency pair and signal the beginning of a deeper correction.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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