The OPEC+ decision raises concerns about a renewed increase in inflation

The OPEC+ decision was a complete surprise for the market. There is a geopolitical game here. Relations between the US and Saudi Arabia will deteriorate – there is no doubt about it. There are concerns that the move from an expanded cartel could complicate the Fed's fight against inflation. Despite the unfavorable decision for the global economy, the SP500 index managed to grow for the fourth session in a row. In turn, yields on US Treasuries and the dollar fell after weak ISM production report.

Opening with a price gap 

Oil opened an upward gap on Monday as a result of the decision to cut production. Brent grew over 6 percent. Currently, the CFD is trading at $85,4 per barrel. On the technical side, the quotes are above the downtrend line, which suggests that the downward trend that has been going on since June 2022 is likely to change, at least in the medium term. Everything indicates that the lows set by the price on March 20 (approx. USD 70) are becoming a medium-term low and the quotations are entering the upward phase. We have received a clear, fundamental signal that will support higher oil prices.

Yesterday there were comments from the Federal Reserve. James Bullard - one of the biggest "hawks" in the American institution - does not hide the fact that cutting production by OPEC + makes Fed's job of bringing inflation down is 'slightly more difficult'. He added that it is an open question whether this fact will have a lasting impact on inflation. In his opinion, higher oil prices would have occurred anyway due to the return of the Chinese economy to full efficiency and due to the fact that Europe successfully bypasses the scenario of a deep recession and the United States shows quite solid macro data. He also expressed his optimistic view of the recent turmoil in the banking sector. In his opinion, this crisis will be alleviated quickly. Looking at the declining use of regional bank loans from the Fed, one can assume that Bullard is quite right on this point. He also referred to central bank policy, saying the Fed has adopted a two-pronged strategy, including macro-prudential tools to deal with banking problems and continued rate hikes to fight inflation.

Need for further tightening

Words of reassurance were sent to the market by Janet Yellen, who admitted that the situation around American banks was stabilizing. This state of affairs is indicated by the decreasing outflows of capital from smaller and medium-sized entities. Apparently, the Secretary of the Treasury has drawn conclusions from the recent unfortunate statement that caused a sudden, though short-lived decline on Wall Street. Yellen criticized the OPEC+ decision, calling it an unconstructive move that is bad for the global economy.

Representatives also spoke in Europe EBC. Governing Council member Robert Holzman confirmed a possible next move in rates by 50 basis points at the next meeting in May, which is strengthened by the European institution remaining on a restrictive monetary policy course. The "stickiness" of inflation was pointed out by Gediminas Simkus, which should be interpreted as "hawkish" rhetoric.

It is clear that there are voices on both sides of the Atlantic about the need to continue further tightening. Decision makers are trying to almost unanimously show that the fight against inflation is not over and prove that there is still high determination among these institutions to take actions aimed at bringing it back to its target.

From the macro data yesterday we learned the ISM index for the US manufacturing for March. There was a disappointment here, as the main indicator showed a level of 46,3 points. which was below market expectations. There was also a deterioration in the results of individual sub-indices. Under 50 pts. The Paid Price Index ranked, which may be positive in terms of further developments in the area of ​​inflation.

For publication EURUSD responded with increases, albeit limited. The exchange rate has been increasing since the early hours of the morning, thus eliminating Friday's declines. Currently, the quotes are below 1,09. However, the road to level 1,1 is still open.

Source: Łukasz Zembik, OANDA TMS Brokers