Sterling was subjected to selling pressure after Monday’s European open amid further domestic and global pressures. Confidence in the UK economy remains notably weak and the further slide in risk appetite was also crucial in undermining UK currency support. Sterling dipped to fresh 22-month lows against the dollar, but there was an aggressive round of short covering amid evidence that the UK currency was over-sold after very heavy losses. Bank of England MPC member Saunders stated that key measures of longer-term inflation expectations are uncomfortably high and that a process of de-anchoring expectations would be very costly in economic terms. In this context, the bank should lean heavily and the risk of higher inflation becoming embedded and that he wanted to move quickly to a more neutral stance. He added that an estimate of the neutral rate is between 1.25-2.50%, but he did not back a rate increase of 75 basis points at the latest policy meeting with the choice seen as between 25 and 50 basis points. Overall confidence in the UK outlook remained very fragile. BRC data recorded a 1.7% decline in like-for-like sales in the year to April and there were further concerns over Brexit developments. Risk trends tended to dominate and a very fragile recovery allowed Sterling to recover slightly early on Tuesday.
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The Euro-zone Sentix investor confidence index retreated to -22.6 for May from -18.0 previously and weaker than consensus forecasts of -20.8. Underlying Euro-zone sentiment also remained weak during Monday, but Euro was unable to find support and another failure to hold triggered a round of short covering.
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Minneapolis Fed President Kashkari stated that the Fed will change its approach if the data comes in differently and there was some evidence that inflation was softening just a hair. Atlanta Fed President Bostic stated that 50 basis-point increases are pretty aggressive and that the Fed can stay at this pace with no need for 75 basis-point increases. He added that the Fed Funds rate needs to be in a range of 2-2.5% by the end of 2022. There were some concerns that weaker equity markets would undermine the US outlook and speculation that this could trigger at least a limited reassessment by the Fed.
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