In comments on Tuesday, Bank of England Chief Economist Pill stated that he sees further policy tightening in monetary policy with the bank ready to act if there is evidence of persistent price pressures, although he added that the bank faces a narrow path between persistent inflation pressure and recession. As far as Sterling is concerned, Pill stated that he was worried that using monetary policy to stabilise the exchange rate in the short term would distract the bank from its goals. Following Mann’s comments on Monday, there was still speculation that the bank could raise rates faster to help curb imported inflation and curb wage settlements. Sterling posted solid gains after the European open with a move to above 1.2300 against the dollar with further short covering.
The CBI industrial orders index retreated to 18 for June from 26 in May and slightly below expectations of 22 with solid growth in output, although with signs of a net slowdown. There was a significant moderation in expectations surrounding prices growth with the lowest reading since September 2021. The UK currency was unable to sustain the gains as underlying sentiment towards the economic outlook remained weak. The UK CPI inflation rate met expectations with an increase to 9.1% from 9.0%, but the underlying rate declined slightly more than expected to 5.9% from 6.2%. Weaker risk appetite tended to sap Sterling support.
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Consumer Price Index Prev 9.1% Exo 9.1%
ECB council member Rehn stated that it was very likely that the September rate hike will be bigger than 25 basis points. Markets continued to price in around 75 basis points of tightening for the July and September meetings combined. In this context, the rhetoric provided only limited Euro support. The German gas regulator stated that the gas situation is tense, but stable and reiterated its call for the country to save as much gas as possible. There were underlying reservations over the outlook for energy prices, especially as there will be a negative impact on the Euro-zone economy. The BDI added that there was a recession risk in Germany as the Russian gas crisis intensified. The Euro advanced to highs against the dollar before fading.
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ECB’s Elderson speech
Richmond Fed President Barkin stated that he had thought that a 75 basis-point rate hike was possible at the June meeting after the latest University of Michigan consumer confidence index recorded an increase in long-term inflation expectations to 3.3% from 3.0%. He added that there was not much reason to stop raising interest rates if inflation keeps escalating. He added that the Fed will do what it takes to reduce inflation and it should come down, but it will take some time. Narrow ranges prevailed later in the day with the Euro settling. The dollar secured fresh support from weaker risk appetite on Wednesday with the Euro dipping despite a sharp decline in oil prices with comments from Fed Chair Powell watched closely later in the day.
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President Biden speech