Many traders are concerned about the Bank of England’s meeting next week, as there is a possibility of an aggressive interest rate hike. This could have a significant impact on the markets, as it would increase the cost of borrowing and could lead to a sell-off in riskier assets. While a rate hike is not guaranteed, the fact that traders are worried about it highlights the importance of the meeting. The Bank of England will need to carefully consider the potential implications of any policy change, in order to ensure that it does not unintentionally destabilise the markets.
Problem: The Bank of England is set to meet next week and traders are worried about an aggressive hike.
Agitate: An aggressive hike could mean bad news for the economy, as it could lead to stagflation.
Solution: The inflation rate has eased, which means that the case for a dire stagflation outlook has been somewhat diminished. This could take some pressure away from policymakers when they convene next week, reducing the need for an aggressive hike.
“Today’s unexpected softening of headline inflation in the UK is likely to encourage traders in the short-term, providing some relief for the GBP and the Bank of England. With the annual inflation rate easing to 9.9% in August, having been expected to soar above 10%, already the GBP has gained on the print. Ultimately, this means that the case for a dire stagflation outlook has been somewhat diminished, which could take some pressure away from policymakers when they convene next week, reducing the need for an aggressive hike.
Giles Coghlan, Chief Market Analyst, HYCM
Yesterday’s inflation data out of the United States came as a shock to many in the financial markets, as it was much higher than expected. This led to a sell-off in global markets, as the “Fed soft landing” narrative was priced out. The data showed that inflation in the US is now running at its highest level since 2012, and this has caught many by surprise. There are fears that this could lead to the Fed hiking rates more quickly than expected, and this is why markets have sold off. However, it is important to remember that the US economy is still in good shape, and so this may just be a temporary blip. Time will tell, but for now, markets are on edge after yesterday’s inflation data.
Problem: Yesterday’s inflation data out of the United States was much hotter than expected, sending global markets lower as the “Fed soft landing” narrative was priced out.
Agitate: This news comes on the heels of a series of weak economic reports that have raised doubts about the Federal Reserve’s ability to smoothly raise interest rates this year.
Solution: While some are already calling for an even greater rate hike next week, it’s clear that the Fed will have to act decisively to quell fears of runaway inflation.
“While today’s news has been gently GBP positive, the inflation narrative is continuing its downwards spiral across the pond. The Hot US inflation print yesterday sent global stocks and bonds lower as the ‘Fed soft landing’ narrative was priced out. The strength in the USD on this hot US print is continuing to pressure the GBPUSD pair. The big picture ultimately means that inflation may be ‘stickier’ than the markets have anticipated, and the Federal Reserve will have to act decisively next week – calls for an even greater hike of 100bps are already beginning to mount with Nomura the first out to make that call soon after the print.”
Giles Coghlan, Chief Market Analyst, HYCM
Stagflation is a term used to describe a situation in which the inflation rate is high and the economic growth rate is low. This combination can lead to higher prices for goods and services, as well as reduced purchasing power for consumers. Stagflation can be especially difficult for businesses, as they may find it difficult to raise prices without reducing demand. The term “stagflation” was first coined in the 1970s, when the United States experienced a period of high inflation and slow economic growth. While stagflation is not as common today as it was in the past, it can still have a significant impact on an economy.
