June 20, 2022

Daily Report 20/06/2022

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In comments on Friday, Bank of England chief economist Pill stated that the bank was looking at the persistence of inflationary pressures and price pressures becoming embedded in the economy would be a trigger for more aggressive action. In this context, he noted that the message that it may have to act forcefully is not unconditional. He also said that increasing rates too aggressively would not stop short-term inflation pressures, but would add to the risks of an undesirable slowdown in the economy. He  commented that it was up to markets to decide whether the bank was signalling a 50 basis-point rate hike for August. The rhetoric failed to provide Sterling support given the conditionality attached to forceful action. Risk conditions were also fragile, maintaining a lack of support for the UK currency and there was a fresh retreat. CFTC data recorded a further small decline in short non-commercial Sterling positions to near 65,600 from near 71,000 the previous week.

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On Friday, the Euro drew an element of support from a narrowing of Italian-German yield spreads to below 200 basis points as immediate fragmentation fears eased slightly. ECB council member Knot also stated that several 50 basis-point rate hikes are possible if inflation worsens. The Euro was, however, undermined by fresh concerns over developments in the energy sector as Russia again reduced gas supplies to Germany. CFTC data recorded a sharp reversal in Euro positioning with a net short position of 6,000 contracts from longs above 50,000 the previous week, which should limit the potential for further selling. In French parliamentary election results, President Macron’s centrist party lost its majority with gains for the left and right-wing alliances. 

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14.00 Christine Lagarde Speech

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The dollar overall recovered strongly from falls seen on Thursday with markets considering the sharp losses were due to position adjustment rather than a change in overall stance. In this environment, there was strong interest in buying dollar dips given overall yield expectations. In comments on Friday, Minneapolis Fed President Kashkari stated that he could back a further 75 basis-point increase in rates at the July meeting and it might then be prudent to continue with 50 basis-point hikes after the July meeting. He added that the Fed might need to raise rates beyond what is currently forecasted if inflation drifts higher or the supply side does not improve. The overall stance continues to be a notable shift from the dovish rhetoric that dominated his comments previously.

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12:45 US FED chair Powell speech