Wed, Oct 05, 2022 @ 16:19 GMT
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Risk Back On But For How Long? | UK CPI May Tick Higher | Euro To Continue Its Rally | Crude Flat Despite OPEC Rumours

U.N Voted In Favour Of Stepping Sanctions on North Korea
Higher Call Premium Suggests Higher Euro
OPEC Considers To Extend Production Cut While US Refineries Resuming Operation Gradually
UK’ CPI Data Influenced By Higher Fuel Price

European markets are continuing their ascent and picking up their momentum from Wall Street. The S&P500 index closed at a record high yesterday demolishing any resistance in its way. Investors are surely feeling less concerned about the potential hurricane damage costs. This has brought back the traditional risk-on trade.

U.N Voted In Favour Of Stepping Sanctions on North Korea

The risk-on trade is also influenced by the subdued North Korean situation. Having said that, the UN has decided to vote in favour of stepping up the sanctions on the country. Although, the approved sanctions by the U.N are toned down versions of what was discussed before. A reaction to this action should not be underestimated. This new situation has taken some steam out of the dollar rally. The dollar bounced from its two and half years low, but the lingering geopolitical situation shows we are not out of the woods yet. The element which could provide oxygen for the dollar rally would be a stellar reading of the US inflation number (due on Thursday).

Higher Call Premium Suggests Higher Euro

The euro-dollar has also retraced from its highs, the ECB president, Mario Draghi and other members of the governing council are using vigorous verbal intervention to keep the currency at a more reasonable level. However, the devil is in the detail and investors cannot ignore the fact that the minimal reduction in the inflation forecast paints a very bullish picture. In simple words, the ECB is confident that the domestic demand would be strong to offset the drag from the higher currency. Therefore, it confirms that there is still more upside for the Euro. The higher premium on calls of all tenors up to nine months is pretty much supporting this view.

OPEC Considers To Extend Production Cut While US Refineries Resuming Operation Gradually

Oil prices have shown a very much muted reaction to the news that the biggest oil player in the OPEC is open to extending the oil production cut. Russia is also on board along with other OPEC producer on this idea, however, if that will become a reality would be a different situation. The reason is that from the previous similar situations we have learned that this kind optimism changes to a more conflicting information as you move closer to the time. The US gulf coast refineries are gradually resuming their operations and this should support the oil price. The industry is still not back to its normal level after being hit by the worst hurricane since 2005 and nearly 12.5% refineries are still shut.

UK CPI Data Influenced By Higher Fuel Price

As for Sterling, it is the CPI data which is going to be under focus. It would provide the guidance and more daylight for traders in relation to the next move by the Bank of England. We do not expect the overall story to change which is that inflation is overshooting the bank’s target thanks to a lower sterling. The bank would only change its stance on its monetary policy if inflation is supported by higher wages, not due to the lower currency. Another significant support for inflation is coming from higher fuel prices as the cost of filling up the tank at the gas station has increased nearly by 1.6%. Thus, the annual rate could see an uptick reading. Traders would take that as a signal that this is going to increase the pressure on the BOE to increase their interest rate.

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