Vaccine Scepticism and Tanking Inflation

UK inflation drops below 1%

Charts (1)

After Monday’s impressive moves, Tuesday trading was more subdued. Owning to a shortage of fresh catalysts, European bourses look set to slip lower on the open, after a mixed session in Asia overnight.

Vaccine optimism, which sent stocks surging on Monday, has eased considerably with scepticism creeping in after a report cast doubt on a potential covid-19 vaccine. The medical news website STAT released a report, on Tuesday, questioning Moderna’s vaccine announcement at the start of the week, saying it had provided insufficient data to determine the vaccines efficacy. US stocks dropped following the news, with Wall Street ending the session in the red.
In the absence of a vaccine, governments easing lockdown restrictions and the gradual reopening of economies remains a relevant theme.

Gold shines
Gold continue to trade on the front foot as vaccine disappointment has seem investors rotate out of riskier assets such as stock and move towards the traditional safe haven. After dropping lower on Monday following the vaccine announcement, the precious metal is on its second consecutive day of gains as it heads back towards $1750. 
Gold will remain in focus as investors shift their gaze towards the release of FOMC minutes later today. Any hint of negative rates becoming a serious option for the Fed could see gold push through Monday’s 7.5 year high and head towards $1800. 

Fed fatigue
Sticking with the Fed, Jerome Powell, Chairman of the Federal Reserve and Steve Mnuchin, US Treasury Secretary gave a length online testimony before the Senate banking committee on the response to the coronavirus crisis. The testimony didn’t create any headlines with Jerome Powell pushing for more fiscal stimulus and White House advisors saying it as under consideration.
The US Dollar is edging mildly higher in early trade on vaccine disappointment safe haven hunting. FOMC minutes could provide food for thought

GBP/USD drops as UK Inflation below 1% 
The Pound has slipped lower versus the US Dollar following the release of UK inflation data. Inflation dropped below 1% in April to a worse than expected 0.8%. The sharp drop in inflation owing to falling oil prices and as demand for goods evaporated in lockdown has raised the prospect of negative interest rates. 

The Bank of England will have been watching these figures closely. Whilst Andrew Bailey has left the door wide open for further bond buying, this has already been priced into the pound. With inflation significantly below the BoE’s 2% target, we can expect negative rates discussion to pick up at the June monetary policy meeting. 

GBP/USD levels to watch:
GBP/USD is trading -0.1% lower, having slipped through $1.2250. The trend is bearish on 4 hour chart.
The pair is testing immediate support at $1.2230, a break through here could open the door to $1.2076 (low 18th May).
Immediate resistance can be seen at $1.2275 (tend line) prior to $1.2467 (high 8th May)


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