May 19, 2022

Daily Report 19/05/2022

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Sterling continued to lose ground after the UK inflation data release as long positions built up in anticipation of an even higher headline figure were liquidated. From a medium-term perspective, there were still important reservations over the economic outlook which sapped support for the currency, especially with doubts that the Bank of England can tighten policy much further given downside economic risks. Fears over a trade war with the EU were also significant in capping support for the currency. Sterling quickly dipped against the dollar. After a tentative rally, the currency was hampered by a renewed slide on Wall Street and there were fresh losses against the dollar as equites moved very sharply lower. There was a brief recovery on Thursday as risk attempted to stabilise, but rallies faded quickly.

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The headline Euro-zone CPI inflation rate was revised down marginally to 7.4% from the flash reading of 7.5% with the core rate unrevised at 3.5%. Markets continued to monitor ECB rhetoric closely after the recent spate of hawkish comments and increased expectations of a July rate hike. In remarks on Wednesday, council member Rehn stated that it is necessary for rates to move relatively quickly out of negative territory and this is a view among many colleagues within the central bank. He added that uncertainty surrounding future price developments had increased. Fellow member de Cos added that bond buying should end early in the third quarter with the first rate hike to follow shortly after. Overall, there was a further small increase in market expectations with around 110 basis-points of tightening priced in for the end of 2022. The Euro was still unable to make further headway and gradually lost ground amid global pressures.

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Treasury Secretary Yellen stated that the US is committed to market-determined exchange rates, dampening any speculation that there could be intervention to restrain the US currency. US housing starts declined slightly to an annual rate of 1.72mn from a revised 1.73mn the previous month and slightly below consensus forecasts while building permits declined to 1.82mn from 1.88mn and slightly above market expectations. Chicago Fed President Evans reiterated that interest rate increases should be front loaded. He considers that a neutral rate is in the range of 2.00-2.50% and that rate hikes could slow to 25 basis-point hikes once the neutral level has been achieved. Philadelphia head Harker took a similar stance as he expects two 50 basis-point rate hikes in June and July with measured increases thereafter. US bond yields edged lower amid a slide in equities and the yen also secured renewed defensive support.

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