In comments on Monday, Bank of England Deputy Governor Cunliiffe stated that the Ukraine crisis will intensify and prolong the surge in inflation and tighten the squeeze on household incomes. He added that companies do not have the same bargaining power as in the 1970’s and he was not convinced that there was a need to lean heavily and constantly against an embedding of an inflationary mind-set. Cunliffe appears unlikely to back aggressive tightening from current levels. The overall rhetoric was broadly dovish, although this would have been expected to some extent given that he voted against the March rate hike. Sterling was resilient despite the dovish stance.
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The April Euro-zone Sentix investor confidence index dipped further to -18.0 from -7.0 previously which was weaker than the -9.2 for March and the weakest since June 2020. Overall confidence in the economic outlook remained fragile, especially given uncertainty over energy prices and risk of disruption to supplies. The German banking lobby BDB stated that the economy would face a steep recession if Russian oil and gas were cut off. The Euro edged lower during the European session against the US dollar as the latest developments in Ukraine sapped support. The evidence of war crimes by Russian forces retreating from the Kyiv area increased expectations that peace negotiations would be even more difficult in the short term. There was also increased pressure for further sanctions against Russia and concerns over the risk of disruption to energy supplies to the EU. In this context, there were further concerns over underlying vulnerability in the economy which undermined the currency. EU council President Michel stated that additional measures were on their way and EU ambassadors are scheduled to meet on Wednesday.
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US factory orders declined 0.5% for March following a 1.5% gain the previous month which was in line with consensus forecasts. After peaking around 2.50%, the US 2-year yield edged lower during the day which had some impact in curbing further selling, although overall demand for the Japanese currency remained weak, especially with Wall Street indices posting further gains. There were no significant comments on monetary policy from Federal Reserve officials during Monday, but markets will monitor comments from Governor Brainard on Tuesday for further evidence on the potential Fed decision at the May policy meeting. Failure to push back against market expectations would be a clear signal that a 0.50% rate hike is likely to be sanctioned at the May policy meeting.
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14.00 ISM Services PMI (Mar) Exp. 58 Prev. 56.5