Sterling was able to make net headway on Monday with a suspicion that selling had been over-done following last week’s Bank of England policy decision. UK yields also moved higher with the 2-year yield above 1.30% which also underpinned the UK currency, although the global surge in yields limited the potential impact. There were expectations that Chancellor Sunak would provide significant fiscal relief in this week’s spring statement which would be potentially important in giving the Bank of England greater leeway to raise interest rates to tackle inflation pressures. There were, however, important underlying concerns over the UK outlook.
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In its latest report, the German Bundesbank stated that higher energy prices will reduce household consumption as well as industrial production. The bank estimated that the economy stagnated in the first quarter of 2022 and the rebound for the second quarter is likely to be weaker than expected. The Bundesbank also expects that inflation will increase further in the short term, especially with supply-chain problems set to worsen. Bundesbank head Nagel stated that the risk of tightening policy too late has increased and that any delay in raising rates could require higher rates later. He added that the risk of second-round inflation effects was increasing. There were further important concerns over the Ukraine war with Moscow stating that there is no basis for a possible meeting between Putin and Ukraine President Zelensky. He did, however, state that he is prepared to discuss a commitment not to join NATO. The Euro overall struggled to make headway.
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13.15 Christine Lagarde Speech
Atlanta Fed President Bostic stated that the Ukraine war will heighten uncertainty, raise costs and exacerbate supply-chain problems. In that context, there were policy risks on both sides and the central bank will adapt as needed. He was less convinced that a more aggressive rate hike was appropriate, although would still be comfortable with more aggressive rate hikes if the data suggests that is appropriate. At this stage, he expects six rate increases this year and two more next year. Fed Chair Powell stated that there is an obvious need to move expeditiously to a more neutral level of interest rates and more restrictive levels if needed to restore price stability. The Ukraine war may have a significant impact on the global economy, but the situation is highly uncertain and Fed projections could become out-dated very quickly. As far as the balance sheet is concerned, action could come at the May meeting, but no decision has been made. The dollar edged higher after the comments, although ranges remained relatively narrow. The overall hawkish Fed tone, however, gradually had a larger impact with market again scaling up expectations on the scale and speed of US rate hikes.
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