May 18, 2022

Daily Report 18/05/2022

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Sterling maintained a firm tone after the UK labour-market data with the evidence of a tight labour market and strong upward pressure on private-sector wages increasing expectations that the Bank of England would take a more aggressive stance on interest rate hikes. The UK currency also gained support from a firmer tone surrounding risk appetite with the currency rebound also triggering further short covering. There were underlying reservations over Brexit developments and government plans to introduce legislation to over-ride parts of the Northern Ireland protocol, although the market reaction was measured with hopes that negotiations will continue. Overall, the UK currency maintained momentum during the day and advanced to a peak against the dollar before consolidating lower. The headline UK inflation increased to 9.0% for April from 7.0% and the highest reading for 40 years, but slightly lower than the expected rate of 9.1%. Markets had been braced for an even higher figure and there was a slight Sterling correction.

Key Data

7.00 Consumer Price Index (YoY) Act. 9% Exp. 9.7% Prev. 7%

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Euro-zone first-quarter GDP increased 0.3% according to the second reading and slightly above forecasts of 0.2% with 5.1% annual growth from 5.0% previously. ECB council member Knot stated that monetary policy needs to be normalised and a 25 basis-point rate increase is realistic for July. He added that 50 basis-point increases should not be excluded if data in the next few months suggests that inflation is broadening. Hawkish rhetoric continued to underpin the Euro and the single currency continued to gain with short covering in evidence.

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US retail sales increased 0.9% for April after an upwardly-revised 1.4% increase the previous month and in line with market expectations. Underlying sales were slightly higher than consensus forecasts with a 0.6% gain and there was a bigger beat for the control group with a 1.0% increase compared with expectations of a 0.5% gain and following a 1.1% increase the previous month. Fed Chair Powell stated that the central bank knows this is a time for a laser-focussed approach on bringing inflation down and on-going rate increases are appropriate with a broad consensus on the committee that 50 basis-point increases will be on the table at the next couple of meetings. The economy also needs growth to slow so that the supply side can catch up. If there’s convincing evidence that inflation is slowing the rate of rate hikes can slow, but the Fed will have to act more aggressively if not and won’t hesitate to go beyond neutral if necessary. Powell also expressed a high degree of uncertainty, especially given the Ukraine war.

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