September 09, 2022

Daily Report 09/09/2022

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The government confirmed that the energy price guarantee scheme will be in effect for two years and will cap the average household fuel bill at £2,500 for two years. Given the existing support measures announced previously, overall energy prices are likely to be held close to current levels for the next six months. Importantly for markets, the government did not provide any details on the likely size of the package and the impact on government borrowing. According to the government, the initial estimate is likely to be available towards the end of September. The lack of details on funding will tend to unsettle markets, especially given the recent sell-off in government bonds. Equities also lost traction which sapped potential Sterling support, although the focus quickly moved to reports of serious health problems for the Queen. London markets were closed as the death of the Queen was formally announced.

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The Euro edged higher ahead of Thursday’s ECB policy decision with a slightly softer tone and a covering of short positions and it nudged higher against the dollar. Overall sentiment towards the Euro-Zone remained very fragile with the IFW economic institute maintaining a generally downbeat stance and forecasting a 0.7% GDP contraction for 2023 with inflation at 8.7% next year. The ECB increased interest rates by 75 basis points to 1.25% at the latest policy meeting which was in line with consensus forecasts; although a minority of investment banks had expected a 50 basis-point hike. This was the largest rate hike sanction by the central bank since its inception and it expects rates to increase further. The inflation forecasts were increased with staff projections that it will average 8.1% this year before a decline to 5.5% in 2023 and 2.3% in 2024. The GDP growth forecast for 2022 was revised down to 3.1% with growth in the following two years of 0.9% and 1.9% respectively.

According to the ECB, price pressures have continued to strengthen and broaden across the economy and inflation is liable to climb further in the short term.  The Euro was unable to gain any support from the rate decision and dipped lower against the dollar also gained net support after the comments from Powell. ECB rhetoric remained hawkish with comments that a further 75 basis-point rate hike should not be excluded.

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ECB’s President Lagarde speech

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The US Dollar continued to firm against its rivals despite the turnaround in global market mood. Lending considerable support has been the sustained hawkish rhetoric from Federal Reserve policymakers as tackling inflation remains the number one priority. Expectations of another bold three-quarter point hike have edged up, with the probability now sitting at 82%. A third consecutive rate hike is looking more likely after a string of positive economic data releases. With the next policy meeting approaching, expectations of a bold rate hike are continually bolstering the US Dollar.

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