May Start Set for More Inflation Headwinds

The beginning of May is set for more inflation headwinds in the US, UK and European Union, affecting a wide range of trading instruments and underlying assets.  

Crude Oil spot prices 

Upward inflation pressures may ease slightly in the crude oil markets because of demand-side developments with the lockdowns in China which are expected to spread from Shanghai into Beijing. At the same time, the conflict in Ukraine and accompanying supply-side risks from Russia’s oil production show few signs of alleviating. Any signs of a lasting truce in Ukraine could ease inflation in the oil markets. Failing that, the likelihood of volatility in the crude oil markets remains high. 

Gold spot prices 

Gold spot prices gave way to a bullish USD in the last week of April as the safe haven assets vied for investor attention. At the time of writing, expectations are that the US Federal Reserve, Bank of England and ECB are on their way to an epic run of monetary tightening to limit inflation.  

Monetary tightening 

Will the Federal Reserve raise its key interest rate by 0.5 percent or 0.75 percent during its May meeting? St Louis Fed President Bullard is pushing for a raise of 0.75 percent while Fed Chairman Jerome Powell supports a 0.5 percent hike. Either scenario is likely to support the USD as investors price in the likelihood of higher interest rate incomes for the banking sector and improved confidence in the central bank’s timely actions to limit inflation damage.  

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EURUSD 

The USD’s strength in April sent the EUR on a bearish trajectory and the pair is heading for multi-year lows at the time of writing. The Eurozone’s currency was weighed down by elections in France and the conflict in Ukraine clouding the bloc’s growth outlook. While the elections are over, the geopolitical worries will likely persist into May, and the ECB remains more dovish than the Federal Reserve and the BoE.  

GBPUSD 

The BoE hiked its key interest rate guidance three meetings in a row, supporting the GBP. The central bank’s next meeting is on May 5, when it is expected to continue its monetary tightening. This may support the GBP against the USD bulls in the short term.  

USDJPY 

The USDJPY hit 20-year highs in April and unless the Bank of Japan wavers in its dovish course, there may be more of the same in May if the Federal Reserve does what the markets expect. The Federal Reserve meets on 3-4 May, just ahead of the Bank of England’s rate decision.  

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.