May 18, 2023

Daily Report 18/05/2023

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Sterling lost ground in early Europe on Wednesday, primarily under the influence of a stronger US currency with 3-week lows. Bank of England Governor Bailey stated that the economic outlook is much brighter than it was a few months ago with the bank now forecasting modest growth rather than a shallow and long recession. Bailey noted that inflation has been higher than expected, but that it will decline sharply over the next few months. He reiterated that inflation risks are skewed to the upside and the bank’s commitment to the 2% target is unwavering. He added that there was evidence of the labour market softening, but at a slower pace than expected by the bank in February. There were no significant dovish elements in the comments and Sterling regained ground later in the day. Sterling was unable to make any further headway on Thursday with markets waiting for further comments from Bank of England officials.

Key Data

10.15 Bank of England Monetary Policy Report Hearings

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The Euro-Zone April inflation rate was confirmed at 7.0% with the underlying rate also in line with the flash reading at 5.6%. The ECB will be particularly concerned over the core rate and the risk of further second-round effects which could keep inflation well above target. The Euro overall was unable to recover ground with markets fretting over the outlook for yield spreads. The Euro-Zone data has been generally weaker than expected while the Federal Reserve has remained committed to a hawkish stance to bring inflation under control. Comments from ECB officials will continue to be monitored closely in the short term while the PMI data next week will be important.

Key Data 

10.00 Christine Lagarde Speech

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US housing starts increased slightly to an annual rate of 1.4mn for April from 1.37mn the previous month and in line with consensus forecasts while building permits edged lower to an annual rate of 1.42mn from a revised 1.44mn previously and slightly below market expectations. House Speaker McCarthy stated that he would spend all his effort to resolve the debt-ceiling issue and that there is the opportunity to find common ground, but only a few days to get the job done. He added that there would not be a debt default. President Biden stated that he is confident that an agreement on the debt limited will be reached, but negotiations will inevitably be fractious.

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