August 18, 2022
Daily Report 18/08/2022
After jumping on release of the UK inflation data, Sterling was unable to hold the gains and gradually drifted lower. Although there was further speculation that the Bank of England would have to tighten monetary policy more aggressively to exert downward pressure on inflation, there were concerns that underlying inflation differentials would undermine the UK’s competitive position and trigger long-term depreciation pressure, especially with upward pressure on business costs. There was also a steeper inversion of the yield curve during the day with the 2-year yield at the highest level since 2008. Sterling is also correlated strongly with global risk conditions and the overall mood was more defensive during the day with significant losses in equities.
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Euro-Zone second-quarter GDP was revised marginally lower to 0.6% from the flash estimate of 0.7% with a 3.9% annual increase. The Euro was unable to make any headway of Tuesday’s US open and tended to drift lower amid an underlying confidence in the Euro-Zone outlook with a move to just lower against the dollar.
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US retail sales were unchanged in July after a revised 0.8% increase the previous month and marginally below consensus forecasts. Underlying sales increased 0.4% on the month while the control group recorded a 0.8% increase after a 0.7% gain in July. The data overall eased immediate concerns over retail spending, although the data is not adjusted for prices and there were mixed trends for the month, especially as gasoline prices declined. Fed minutes stated that some participants noted that the policy rate would have to reach a sufficiently restrictive level to control inflation and remain there for some time. There were also comments that there had been little progress in curbing inflation pressures, although supply-side improvements could help. Officials, however, saw a slower pace of rate hikes at some point and many officials also saw the hazard that the central bank could tighten more than necessary. Following the minutes, futures markets priced in around a 60% chance that there would be a 50 basis-point rate hike at the September meeting.
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