June 16, 2023

Daily Report 16/06/2023

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There were no significant UK developments during Thursday with markets monitoring US yields closely. Sterling found support against the dollar and edged higher while the Euro recovered ground. There are strong expectations that the Bank of England will hike rates again next week. Risk appetite strengthened during the session, especially with expectations that China would announce a fresh stimulus package. In this environment, the UK currency gained fresh support with 13-month highs.

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The ECB increased interest rates by 25 basis points following the latest policy meeting which was in line with consensus forecasts as the refi rate was increased to 4.00%. The ECB raised the inflation forecasts with the underlying rates now forecast at 5.1%, 3.0% and 2.3% respectively for 2023, 2024 and 2025, all above target. There was a slight downgrading of GDP growth forecasts. The bank stated that rates will be brought to sufficiently restrictive levels.

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The Federal Reserve being more hawkish than anticipated on Wednesday had a lot to do with this, but we have at the same time the ECB come out and sell just as hawkish, and it’s that little bit of a knock on effect against the US dollar. In terms of the Fed, an expected rate pause from the bank this month may lead to subdued demand for the US dollar through the first half of the week. Although there is the prospect of a sharp correction if the US central bank hints its tightening cycle may not be over quite just yet.

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