European stocks are poised to open a little lower on Thursday, tracking moves we saw in the US on Wednesday following Jerome Powell's appearance in Congress.
The Fed Chair appeared before the House Financial Services Committee and very much stuck to last week's script, which should come as a surprise to no one. Inflation is not under control and the vast majority at the Fed believe more rate hikes will be warranted was the message, although we got that from the dot plot.
For once, markets are buying what the Fed is selling and have priced in a 70% chance of a hike in July. But that's where they believe it ends with the easing cycle then starting around the turn of the year so the Fed and the markets aren't entirely on the same page. The data will likely determine whether markets remain in agreement on July as I imagine it will take less to convince investors that another hike isn't warranted than the Fed.
Will the BoE be tempted to hike by 50 basis points?
What the Bank of England would do to be in a position to be debating whether another rate hike or two is even necessary. Instead today, the debate will be whether 25 basis points is even enough or if it should revert back to 50. The central bank has made almost no progress in getting inflation back to 2%, in fact, core inflation is still rising which should be causing some alarm on the MPC.
Aside from the decision itself, the vote will be very interesting today. At each of the last three meetings, two policymakers have voted for a pause. Will they stand firm today or accept that more is needed and what will that hawkish pivot do to interest rate expectations? They're already pretty hawkish, with the terminal rate seen at around 6% early next year but that could cement the view that much more is needed.
Oil remains choppy but edging towards the upper end of its range
Oil prices remain very volatile as we've seen over the last week. Trading has been very choppy as traders have tried to reconcile weaker Chinese growth, slightly more modest support from the PBOC, more hawkish central banks, and resilient economies. We appear to be in a position where we're either waiting for the economy to break or for central banks to achieve their soft landing aims.
Brent remains in its lower trading range for this year between $70-$80 but we are getting closer to the upper end of that and there's still plenty of momentum in the move. A break above $80 could be a very bullish development and suggest traders are feeling less pessimistic about the economy.
Gold sell-off losing momentum ahead of the BoE
Gold has been seriously testing its recent range lows over the last 48 hours but so far it's struggling to generate enough momentum for a significant move lower. Despite Powell's hawkish delivery in Congress, the yellow metal recovered earlier losses to close only marginally lower on the day, albeit below the lower end of the $1,940-$1,980 range it previously largely traded within.
Ahead of day two of his testimony, this time in front of the Senate, gold is trading relatively flat and potentially in need of another bearish catalyst. The sell-off is losing momentum although it could get an extra nudge from the BoE if we see a more hawkish shift.
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