September 20, 2022

Daily Report 20/09/2022

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Sterling came under sustained pressure on Friday following the weaker than expected reading for retail sales. Confidence in the UK economic outlook deteriorated and there were also further doubts whether the Bank of England would be in a position to sanction a substantial monetary tightening given economic vulnerability. With other central banks maintaining a hawkish stance, the UK currency would struggle to gain support from yield spreads. Overall risk appetite was notably vulnerable which undermined support for the UK currency.  CFTC data recorded an increase in short Sterling positions to just over 68,000 contracts in the latest week from 50,000, the largest short position for over 3 months.

Sterling again found support on Monday and recovered a little with UK markets closed for a holiday while the Euro posted 19-month highs before correcting slightly.

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The Euro was on the defensive in early Europe on Friday with dollar strength continuing to dominate currency markets as risk appetite remained extremely fragile. ECB council member Villeroy stated that the central bank is attentive about the exchange rate, but with little net impact.

According to the preliminary September reading, the University of Michigan consumer confidence index recovered to 59.5 from 58.2 the previous month, but slightly below consensus forecasts of 60.8. The current conditions index increased marginally to 58.9 from 58.6 and below expectations while the expectations index posted a stronger recovery to 59.9 from 58.0 previously. The inflation components had a more significant impact. The 1-year inflation expectations index declined to 4.6% from 4.8% previously while the 5-year expectations index edged lower to 2.8% from 2.9%.

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ECB’s President Lagarde speech

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The dollar edged lower following the data with future markets indicating that the possibility of a 100 basis-point rate hike at this week’s meeting had declined to just below 20%. The Euro found support and rallied into the London fix with a move back above parity.

CFTC data recorded a sharp decline in short Euro positions to just under 12,000 contracts from 36,000 previously and the smallest short position for over two months.

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