July 12, 2022

Daily Report 12/07/2022

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Sterling was unable to make any headway on Monday as a more fragile tone surrounding risk appetite sapped support and domestic economic reservations persisted. The Conservative Party leadership candidates continued to campaign on the basis of tax cuts which could give the Bank of England greater scope to raise interest rates, but the overall impact of potential fiscal policy changes was seen as limited. The 1922 committee confirmed that the first round of voting will take place on Wednesday after nominations close on Tuesday with the aim to declare a new Prime Minister on September 5th. Sterling retreated to fresh 2-year lows against the Dollar before a slight recovery into the European close. BRC data recorded a 1.3% decline in like-for-like retail sales for June with a sharper decline in volumes. Barclaycard reported higher consumer spending, but this was focussed on a surge in spending on utilities.

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18.00 Andrew Bailey Speech

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The Euro was unable to make headway ahead of Monday’s New York open with the currency again undermined by a wider lack of confidence in the Euro-Zone outlook amid fears over gas supplies. There were also further doubts whether the ECB would be able to push ahead with significant rate hikes given pressure on growth. Although trading conditions were initially subdued as is often the case on the Monday after the US employment report, the Euro continued to grind lower.

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The dollar was supported by expectations of aggressive Federal Reserve hikes and concerns over tightening financial conditions. There was also speculation over a strong US consumer prices reading this week which would reinforce pressure for aggressive Fed rate hikes and tend to undermine risk appetite. The latest New York Fed survey recorded an increase in 1-year inflation expectations to 6.9% from 6.6%, but 3-year expectations declined to 3.6% from 3.9%. Consumers overall were less confident in the labour market. Kansas City Fed President George stated that the speed at interest rates increase is an open question. The pace needs to be balanced carefully against the state of the economy and financial markets while moving too fast would risk over-steering.

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