On the Spot: Tales of the Expected and Unexpected

April 15, 2024

Market run-through

Christine Lagarde didn’t disappoint the doves on the ECB when she gave the strongest hint possible that there will be a cut in interest rates for the Eurozone in June. This marks a change from Fed dependence to divergence by the ECB and of course, comes with risks. After another stronger-than-expected CPI number in the States, the tenth in a row, expectations on the start of the Fed rate-cutting cycle moved further out in the year and the predicted number of cuts continued to fall. With the spread between Eurozone and US deposit rates looking set to widen it looks more than likely that the euro will drop sharply with some predicting the pair to test parity. However, President Biden did say rates were dropping so maybe he will gallantly come to Madame Lagarde’s rescue!

This week looks likely to be overshadowed by events in the Middle East and the threat of an escalation of hostilities by Iran. These fears have helped underpin Gold’s recent rise and pushed oil back up quite sharply which of course impacts inflation expectations. More mundanely this week the inflation fickle finger of fate points towards Threadneedle Street as the latest data for Weekly earnings, CPI and Retail Sales are released. In recent communications, the Old Lady has said that she was watching wage growth and services inflation both of which she will be hoping for signs of moderation. However, those hoping for figures good enough for a Base Rate cut in May should do well to remember that one swallow doesn’t make a summer, even with the sun shining at last in the UK!

Richard Matthews, Head of FX and Payment Partnerships

Chart of the week

If there is one thing that has troubled me more than any other in recent days, from a market perspective at least, it has been the relentless rally seen in gold, with the yellow metal rocketing higher, printing fresh all-time highs on an almost daily basis, and now probing $2,400/oz for the first time on record. Frankly, the move is puzzling, as it comes at a time when risk appetite remains firm, rates continue to ratchet higher across the Treasury curve, and demand for the dollar remains resilient – hardly a textbook mixture for gold strength, quite the opposite in fact! One questions, then, what may be driving bullion. Retail demand doesn’t appear to be the cause, with gold ETF outflows having accelerated of late, and been detached from the spot price since the turn of the year. Perhaps central bank demand may be a catalyst, though this feels a little like ‘scraping the barrel’ for a narrative. Geopolitical developments also remain in focus, though ascribing a $400 move in gold to that risk premium alone is a stretch. Whatever the cause, momentum still strongly favours the bulls for now, with the move being one that it appears unwise to try and step in front of just yet, especially with the market displaying few, if any, signs of putting in a top.

Michael Brown, Market Analyst at Pepperstone

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