August 22, 2022
Daily Report 22/08/2022
Sterling failed to gain any support from the stronger than expected retail sales data on Friday with underlying sentiment towards the economy remaining very weak. There were further major concerns over the impact of extremely high energy prices, especially with the countdown to the October spike in prices continuing. Industrial action in pursuit of higher wages also reinforced a lack of confidence, especially with long-term fears over the competitive outlook. The weekend announcement of a strike at the port of Felixstowe further undermined confidence with markets monitoring the Conservative Party leadership election amid pressure for Truss to row back from aggressive tax cuts. The latest PMI data this week is expected to register a further limited net deterioration, but any dip into contraction territory would further damage confidence.
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The Euro-Zone June current account returned to a €4.2bn surplus after a deficit of €6.9bn for May and compared with expectations of a further deficit. The 12-month surplus narrowed to €12bn and 0.9% of GDP from €361bn and 3.1% of GDP the previous year, illustrating the sharp underlying deterioration. There was no change in the underlying trend ahead of Friday’s New York open with the dollar maintaining a firm tone while Euro support continued to be undermined by a lack of confidence over the Euro-Zone fundamentals, especially with fears over the impact of a surge in gas supplies. Gas prices continued to increase to fresh record highs on Friday which further undermined confidence in the Euro-Zone outlook. Increased tensions over the Zaporzhzhia nuclear plant in Ukraine also increased fears that there could be a complete cut-off in gas supplies from Russia.
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There were no significant US developments, although the decline in equities provided defensive dollar support, especially as commodity currencies were subjected to sharp selling pressure. Richmond Fed President Barkin stated that the Fed will what it takes to return inflation to target while a reduction of the central bank balance sheet should add to the tightening of financial conditions. Fed rhetoric will be watched closely with a key speech from Chair Powell due later in the week.
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