July 05, 2022

Daily Report 05/07/2022

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Sterling edged higher in early Europe on Monday with a further element of short covering following the sharp recovery during Friday. Sterling advanced to daily highs  against the weaker dollar, but momentum faded quickly with a gradual retreat during the European session. Overall confidence in the UK economy remained weak which continued to sap support for the currency. Markets also continued to fret over the Euro-Zone and global economic outlook which also sapped potential support for the currency and Sterling retreated after the European close. There was little change on Tuesday despite solid risk conditions with markets continuing to fret over the underlying UK outlook. Markets continued monitoring comments from Bank of England officials during the day as well as UK political developments. Overall risk expectations will also remain a key element in the short term.

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Germany recorded a trade deficit of €1.1bn for May after a €3.0bn surplus for April. This was the first deficit since 1991 as exports declined slightly on the month and imports posted a net increase as energy costs remained elevated. The trade data will maintain concerns over the German outlook and also undermine wider confidence in the Euro-Zone outlook, especially with on-going concerns over the impact of very high gas prices. The Ukraine retreat from Lysychansk and Russian control of the whole of Luhansk increased fears that there would be a prolonged conflict with further damage to the Euro-Zone economy which could also put ECB rate hikes in jeopardy amid fears over stagflation. The Euro-Zone Sentix economic expectations index dipped further to -26.4 for July from -15.8 previously and well below consensus forecasts of -19.9. There was notable deterioration in Germany and Sentix also noted important distortions from the energy crisis. It also stated that the Euro-Zone is in the eye of a storm and very difficult conditions would continue in the short term. Overall trends in energy prices will continue to be watched closely in the short term.

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US yields moved higher early on Tuesday. US Treasury futures edged higher on Monday with further reservations over the economic outlook following the ISM data last week. Trading activity was, however, inevitably subdued given the closure of US markets for a holiday. There was also an element of caution ahead of the latest US jobs data at the end of this week.

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