Daily Alert – Tuesday 24th May 2022: ECB falls into line

Mark NugentDaily Alert, May 2022

Daily Alert – Tuesday 24th May 2022: ECB falls into line

Good morning.

Yesterday saw a modest risk-on rally. However, commitment was lacking, as evidenced by the S&P500 and Japan225 H1 charts which did not show significant, sustained upwards movement into the close of the daily candle. This dissuaded me from going long on equities. I turned to JPY, which was sinking on the positive sentiment. A look at the H1 chart showed a much more definite, consistent move, in this case downwards. The AUD was doing the same in the opposite direction. So that suggested a AUDJPY long trade. Looking at the D1 chart showed that although the candle was rising into the close, it had failed to breach resistance. So, I did not enter at market (i.e. getting immediately into the trade) but instead placed a pending long order just above the resistance zone, requiring the trade to move further in my direction before getting in. So far it has not been triggered. This may seem like an abundance of caution, but Monday’s risk-on rally has failed to roll-over into today.

Over at the ECB, Christine Lagarde signalled clearly that rate hikes are coming. The ECB has fallen into line. There seems to be some fuzzy thinking going on here, and not just with Christine. There are two issues. Firstly, is inflation transitory or structural? It is clearly structural. Capitalism took a two-year holiday and, like a lot of us, is struggling to get back to the office. Secondly, can the ensuing inflation be tamed by interest rates? I’m not sure how increasing rates puts more boats on the water or stops the Chinese locking everything down every 5 minutes in the hopeless pursuit of a zero covid strategy. I am beginning to think the Bank of England Governor Bailey, with his comment that he felt “hopeless” in the face of inflation, is perhaps the most truthful and realistic of all the central bank heads. I take no pleasure in that realisation.

I am sure we will muddle through all this. We usually do.

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