There were no significant UK developments on Friday, but markets were monitoring UK bond markets closely. The UK 2-year yield increased to just above 3.50% and an 8-month high which provided underlying Sterling support, especially with expectations that the Bank of England will sanction further multiple rate increases. Overall risk appetite held steady with further interest in carry trades. CFTC data recorded a small decline in long Sterling positions to 12,500 in the latest week from 13,200 previously, limiting the scope for further UK currency buying. The CBI has joined other forecasters in expecting the UK to avoid a recession this year, but with GDP growth held to 0.4%.
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The Euro was held in tight ranges during Friday with an underlying theme of consolidation, especially with position adjustment ahead of the weekend. The Euro drifted lower after the European open before attracting fresh buying interest. The failure to break resistance was a significant element in curbing long positions and the single currency drifted lower again into the European close with a retreat. CFTC data recorded a small decline in long Euro contracts to just below 158,500 in the latest week from above 165,000 the previous week. The extent of long positioning will maintain the potential for a closing of long positions and further Euro selling.
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There was little net change in pricing on Friday. At this stage, markets are pricing in around a 30% chance that the Fed will increase rates again at this meeting with around a 70% chance that there will be a rate increase by July. Ahead of the Fed meeting, markets will remain on alert for any unofficial briefings through the Wall Street Journal. There will be a sharp dollar reaction if the Fed suggests that there will be a rate hike, especially as risk appetite would be liable to deteriorate. The US inflation data on Tuesday will also be important.
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