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Weekly Market Recap: UK CPI jumps while Australian Employment disappoints

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UK inflation more than doubled in April due to higher fuel prices, hitting its highest level since the start of the coronavirus pandemic. In Australia, mixed employment data suggested that RBA may not be in a hurry to tighten policy anytime soon. Furthermore, Federal Reserve minutes signals for the first time the possibility of discussing tapering in the coming meetings. 

UK inflation jumps in April in line with BoE expectations

Annual Consumer Price Index, a preferred gauge of inflation, more than doubled to 1.5 % in the 12 months to April 2021. The inflation jump was backed by higher fuel prices and electricity bills as global oil prices climbed from their pandemic lows of 2020. That reading records a sharp jump from the 0.7% rise seen in March and it is the highest level since the start of the coronavirus pandemic. 

Core inflation, which excludes fuel and food prices, ticked higher from 1.1% to 1.3% as well. On a monthly basis, CPI inflation rose by 0.6% in April, following a 0.3% increase in March.

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Inflation data supports BoE’s expectations that inflation is on the path to surpass the target by the end of this year. However, it’s likely to slow down next year as expected by most analysts when reopening boost fades. 

Earlier this month, the Bank of England announced tapering its QE pace amid rising vaccination rates and receding Covid-19 transmission. The Bank has upgraded its assessment for the coming months and now expects the economy to meet and maybe exceed its pre-pandemic level later this year. While the unemployment rate is expected to rise considerably less than previously thought this year.

The BOE’s optimism over the recovery is reflected in upbeat economic forecasts, expecting the economy to get back to pre-pandemic levels in the fourth quarter of this year. And unemployment will likely peak at 5.4%, rather than 7.8% previously expected.

Australian Employment disappoints

Australian employment data largely disappointed as the economy lost 30,600 jobs in April, against an expected gain of 15,000 jobs. On the other hand, the unemployment rate dropped more than expected to 5.5% from 5.7% a month earlier. 

Official data showed that the participation rate decreased from 66.3% to 66.0% and monthly hours worked decreased in April by 13 million hours. RBA officials are likely to closely watch the labor market especially after the decrease in labor force participation.

In its May meeting, the Reserve Bank of Australia (RBA) kept the official interest rate at 0.10% as widely expected but revealed an upbeat outlook.  The Reserve Bank expects the economy to grow faster and unemployment to keep falling further than it did just three months ago. Following its policy meeting on Tuesday, the Reserve Bank updated its key economic forecasts. Now GDP is expected to expand by 4.75 % this year and 3.5% over 2022.

The statement also stated that the economic recovery in Australia has been stronger than expected coupled with steady improvement in the labor market. It revealed that the number of people with a job now exceeds the pre-pandemic level. The committee is expecting a gradual and modest pick-up in inflation and wage growth. Inflation is expected to be 1.5% this year and rises gradually to its targeted level at 2% in 2023. 

Fed Minutes anticipates taper discussions ahead

Federal Reserve minutes for April’s meetings released on Wednesday hinted that some policymakers are getting ready to start tapering discussions soon. Fed members are expecting that discussing a plan for adjusting the pace of asset purchases might be appropriate in upcoming meetings if the economy continued to make rapid progress toward the committee’s goals. It is speculated that the June meeting may signal the next tapering move. 

The minutes, however, reflected some members’ concerns about inflation. Fed officials have repeatedly offered assurances that rising prices in the near term will not translate to long-term inflation.

The discussion revealed in the minutes showed that the committee and for the first time indicates that a reduction in purchases could happen soon given the strong economic performance. Fed officials have made it clear many times that they won’t change policy until achieving employment and inflation targets.

However, the meeting took place before the release of major economic data including inflation and employment numbers. The consumer price index showed inflation rising at a 4.2% year over year pace, GDP is expected to grow by nearly 10% in the second quarter, and indicators in manufacturing and spending are showing strong upward momentum. While employment data showed slower job gains in April, by adding 266, 000 jobs only, while market participants expected the economy to add 990,000 jobs. Unemployment ticked higher to 6.1%. 

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