March 22, 2023

Daily Report 22/03/2023

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There were no major UK economic releases during Monday and overall risk conditions tended to dominate during the day. Sterling was broadly resilient when equity markets came under sustained pressure early in the European session which suggested that underlying sentiment was relatively solid. As risk appetite recovered and equities posted gains, Sterling drew an element of fresh support in global markets. Markets were still doubtful whether the Bank of England would decide to increase interest rates this week, but the UK currency was protected by a scaling back of expectations surrounding other global central banks.

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The Euro remained vulnerable in early Europe on Monday with further fears surrounding the European financial sector as banking-sector stocks moved sharply lower. There were further concerns over the structure of the Credit Suisse rescue by UBS with a particular focus on AT1 bonds. With fears over contagion within the banking sector, the Euro retreated to lows against the dollar, although selling was still relatively contained. According to the latest Bundesbank report, the economy is liable to contract again in the first quarter of 2023, although the decline should be less than the final quarter of 2022. As far as inflation is concerned, the bank warned that core inflation is proving exceptionally persistent and could even increase slightly towards mid-2023. ECB President Lagarde stated that wage pressures have strengthened on the back of robust labour markets and employees looking to recoup some purchasing power.

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12.30 Christine Lagarde Speech

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The US 2-year yield recovered from lows near 3.80% to trade around 3.92% around the European close while the 10-year yield increased to above 3.45%. Markets will remain on alert for any Federal Reserve leaks through the Wall Street Journal ahead of the Wednesday policy decision. Futures markets were little changed on Tuesday and indicated a 75% chance that rates will be lifted by 25 basis points to 5.00% at the latest policy meeting.

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