July 20, 2022

Daily Report 20/07/2022

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There was an element of Sterling support from the latest labour-market data with expectations that the data would push the Bank of England slightly closer to backing a rate hike of 50 basis points at the August meeting. Sterling again challenged the 1.2000 area against the dollar and aimed to hold above this level Bank of England Governor Bailey stated that there was some evidence that supply-chain issues were starting to ease and that the economy is slowing. Nevertheless, he reiterated inflation concerns and stated that a 50 basis-point rate hike would be on the table at the August meeting. He did, however, insist that a 50 basis-point rate hike was not locked in and that the committee will deliberate over the decision. Bailey’s comments provided limited net support to the UK currency with markets more confident over a 50 basis-point rate hike while gains in global equites also provided net Sterling support, especially after the New York open. Stronger risk appetite was also a significant factor in underpinning the UK currency. The headline UK consumer prices inflation rate increased to a 40-year high of 9.4% for June from 9.1% which was slightly above expectations of 9.3%. The core rate edged lower to 5.8% from 5.9%.

Key Data

7.00 Consumer Price Index (YoY) (Jun) Act. 9.4% Exp. 9.3% Prev. 9.1%

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The Euro posted sharp gains just after the European open on Tuesday with the currency gaining support from source reports that the ECB was considering a rate hike of 25 basis points or 50 basis points at this week’s policy meeting. Markets had priced in around 30 basis points of tightening and the increased possibility of a larger rate hike triggered fresh Euro buying. Money markets also moved to price in 100 basis-points of tightening by September. There were also reports that ECB President Lagarde was redoubling the push to get a deal done this week on the ECB peripheral bond tool. The Euro continued to gain support and strengthened. Markets were continuing to monitor the situation surrounding the Nord-stream gas pipeline. Although there was a high degree of uncertainty, the latest source reports suggested that gas flows will resume on Thursday at reduced levels which would provide an important element of relief, but still leave Germany facing important difficulties. In this context, the Euro gained only limited further support with concerns that there would still be potential shortages during the winter. Markets will also monitor Italian political developments during the day with the Euro liable to dip lower if Prime Minister Draghi announces his resignation.

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US housing starts declined to an annual rate of 1.56mn for June from a revised 1.59mn previously and slightly below consensus forecasts. Building permits were unchanged at 1.69mn and above market expectations of 1.65mn with an element of relief that a sharper decline was avoided. Treasuries were contained in relatively narrow ranges in early US trading on Tuesday with the 10-year yield close to 3.00% with the yield curve marginally less inverted.

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