May 22, 2023

Daily Report 22/05/2023

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There were no significant domestic developments on Friday with Sterling taking some comfort from a relatively positive tone in risk appetite. CFTC data recorded a renewed increase in long non-commercial Sterling positions to just over 12,500 contracts in the latest week from 4,500 previously and the largest position since October 2021. The underlying positioning will limit the scope for further Sterling buying. The UK inflation data will be watched closely this week with expectations that the headline rate will decline sharply.

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The Euro was able to resist further selling after Friday’s European open, but was unable to make significant headway with underlying caution over the Euro-Zone outlook. ECB President Lagarde stated that the central bank was heading towards more delicate policy decisions moving forward with the bank courageous in taking the decisions needed to bring inflation down to 2%. Markets remain confident that the ECB will raise rates again in June. ECB council member Schnabel stated that the bank can do whatever is needed to bring inflation back to the 2% target. She added that wage growth has picked up substantially, increasing concerns surrounding second-round effects. Her rhetoric remained hawkish, but markets expect notable divisions within the central bank.

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Fed Chair Powell reiterated that inflation is far above their objective and that price stability is the foundation of a strong economy. He also repeated that interest rates may not have to rise as far as otherwise due to the tightening bank credit conditions. According to Powell further tightening was warranted until recently, but the Fed has come a long way and there is uncertainty over the lagged effects of policy. He added that the Fed has not made any decision whether rates are sufficiently restrictive while the risk of doing too much rather than too little is becoming more balanced. Markets overall considered that the rhetoric was relatively dovish and suggested that Powell could back a pause at the June meeting, although conviction was lacking.

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