RBA shocks with bigger rate hike

European markets are heading for a positive open on Tuesday after a mixed close on Monday and solid gains on Wall Street.

•         FTSE rises for a fourth straight day, UK manufacturing PMI data due
•         RBA raised interest rates by a larger than expected 25 basis points
•         Gold falls to a 10-week low on USD strength & ahead of the Fed rate decision tomorrow

Wall Street managed to brush off a broadly disappointing set of manufacturing numbers from the US. Manufacturing growth slowed to a 20-month low in April as the PMI fell to 55.4, down from 55.7, defying expectations of an increase amid ongoing supply chain bottlenecks. With China’s ongoing lockdown supply chain, constraints continue to cloud the outlook.

Today the UK manufacturing PMI is expected to show a slowdown in activity to 55.3, down from 55.5. Rising input costs remain a key concern as firms could struggle to pass on increasing prices to customers, as the cost of living crisis sees households rein in spending.

The FTSE booked gains of 0.5% in the previous session, boosted by rising oil prices as the EU moves toward a phased ban on Russian oil. Today the UK index is set to open 0.5% higher, underperforming its European peers, which are playing catch up after booking steep losses yesterday.

BP posted a jump in net profits in Q1 to $6.25 billion thanks to surging oil and gas prices despite a $24 billion charge after exiting Russia. This was well ahead of the $4.49 billion profit expected.

RBA

The RBA is the first central bank to announce its interest rate decision in a week expected to be dominated by central banks. The RBA raised interest rates from 0.25% to 0.35%, which was above the 0.1% hike that the markets had been expecting and was the first-rate hike by the central bank in over a decade.

The RBA acted more aggressively than expected to rein in Australian inflation, which surged to 5.1% YoY, ahead of the 4.6% forecast. In addition to raising its inflation forecasts.

The RBA and other major central banks spent the end of last year insisting that inflation was temporary before finding themselves well behind the curve and needing to act quickly to tame surging inflation.

AUD/USD spiked to 0.7140 following the announcement before easing back towards 0.71. However, a move over the 200 DMA at 0.7290 is needed to negate the recent steep downtrend.

Gold

Gold price dropped 1.8% in the previous session and is extending those losses today, falling to the lowest level since mid-February on the back of USD strength and expectations of a hawkish Federal Reserve meeting tomorrow. 

The US dollar index rose to an almost 20-year high yesterday as 10-year treasury yields hit 3% for the first time in three and a half years. The Fed will kick off the FOMC meeting later today with a 50-basis point hike expected tomorrow, after the US central bank raised rates by 25 basis points in March. Higher interest rates and a stronger USD hurt demand for the non-yielding, USD-dominated precious metal.