PPI hits a record high above 11%, sellers eyeing GBP/USD’s 100-pip bounce
Matt Weller, CFA, CMT April 13, 2022 5:43 PM
Today’s PPI report suggests that inflation at a consumer level is likely to get worse before it gets better...
After comments from the White House that inflation would be “extraordinarily elevated”, traders were surprised when yesterday’s Consumer Price Index (CPI) report came in roughly in-line with expectations at “”only” 8.5%.
Perhaps the Biden administration got its wires crossed and was instead referring to today’s Producer Price Index (PPI) report? As we just learned, prices on a wholesale level rose a staggering 11.2% year-over-year in March, well above the 10.6% reading expected by traders and economists and the highest level on record for the indicator (dating back to November 2010). Digging into the details of the report, energy prices surged by 5.7% month-over-month, while food prices jumped 2.4%. Even stripping out food, energy, and trade services, the core PPI showed prices rising 7% year-over-year.
For policymakers, today’s hot PPI reading may be even more worrying than yesterday’s CPI reading. After all, PPI is seen as a forward-looking measure of inflation because it tracks the prices for goods and services up the pipeline that will eventually reach consumers. In other words, today’s PPI report suggests that inflation at a consumer level is likely to get worse before it gets better.
Market to watch: GBP/USD
Notably, the release of the PPI report marked the US session high for Treasury yields (so far), but the trend is still toward higher yields across the curve as traders price in not only a 50bps interest rate hike from the Fed at its next meeting in May, but also another 50bps increase in June (~90% odds of each according to the CME’s FedWatch tool) as the central bank tries to aggressively get ahead of price pressures.
After dipping to a 17-month low below 1.30 yesterday, GBP/USD is bouncing back strongly today. Between the (near-term) failed breakdown catching momentum traders offside and the declining yield spread between short-term US and UK bonds, cable could rally further toward the 50-day EMA near 1.3200 as we head through the latter half of the week:
Source: TradingView, StoneX
That said, given the long-term downtrend and likelihood of the Fed raising rates more aggressively than the BOE, traders are likely to view any near-term rallies as counter-trend moves as long as GBP/USD remains below the 1.3300 swing high. Every trend has its ups and downs, but there’s not enough to suggest that today’s big rally in GBP/USD marks the bottom of the downtrend in GBP/USD yet!
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.