Powell's Testimony and UK Inflation Data Drive Market Sentiment

Fed Chair Jerome Powell's testimony and higher-than-expected UK inflation data took center stage in the financial markets, impacting investor sentiment and shaping expectations for monetary policy decisions. Let's dive into the key factors influencing today's market movements.

Powell's Testimony and the Fed's Stance

During his testimony before the House, Fed Chair Jerome Powell concurred with the hawkish impression conveyed by the dot-plot matrix in the recent FOMC meeting. Powell acknowledged the tight job market and emphasized the need to address inflation, signaling that rates would be somewhat higher by the end of the year. However, he also emphasized that the speed of rate hikes was not as crucial as the final rate itself. This nuanced stance led to a reevaluation of rate hike expectations, resulting in Treasury yield declines and a weakened US dollar.

UK Inflation Surges

UK inflation figures defied expectations, with an annual rate of 8.7%, surpassing the anticipated drop of 8.5%. Core inflation, closely monitored by the Bank of England, rose to 7.1%, well above the expected 6.6% rate, reaching a level not seen since 1990. This unexpected surge led market participants to price in a higher chance of a half-point rate hike by the BOE. However, concerns about a potential mortgage crisis tempered the pound's movements.

Oil Inventories and Price Volatility

The weekly API survey revealed an unexpected drawdown of 1.2 million barrels of US crude inventories, contrasting with the projected build of 1.0 million barrels. Gasoline inventories recorded another increase, with a build of 2.9 million barrels. These supply dynamics, coupled with the sale of 1.7 million barrels from the Strategic Petroleum Reserve (SPR), contributed to WTI crude oil prices climbing above $70/bbl and reaching a two-week high.

Bank of Canada's Tightening Bias

In its Summary of Deliberations, the Bank of Canada expressed confidence in the need for more restrictive policies. The central bank observed stronger-than-anticipated growth in Q2 and expressed concerns about core inflation no longer exhibiting a downward trend. The market responded by pushing the Canadian dollar to a nine-month high against the USD, reflecting expectations of a more restrictive monetary policy in the future.