May 23, 2022

Daily Report 23/05/2022

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Sterling gained an element of support from the stronger than expected retail sales report, especially as it generated speculation that the Bank of England would have more scope to raise interest rates. In comments on Friday, Bank of England chief economist Pill reiterated that the central bank faced its most difficult challenge for 25 years. He warned that inflation was liable to increase to above 10% and also commented that the tightening of monetary policy had some way to go. This suggests that there is scope for several further rate increases over the next few months which triggered some reassessment of the UK outlook. Sterling also gained an element of support from a firmer tone surrounding risk appetite, although there was still an important element of caution surrounding the economic outlook and choppy trading during the day. This was the strongest weekly advance since December 2020 as short covering had an important impact. CFTC data recorded a marginal decline in short Sterling contracts, but the figure was still above 79,000 and close to the highest level since 2019, maintaining the potential for short covering if there is a shift in UK sentiment. Fiscal policy will also be watched closely over the next few weeks.  Comments from Bank of England Governor Bailey will be watched closely later on Monday for any further hints on the bank’s potential policy stance.

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17.15 Andrew Bailey Speech

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In comments on Friday, ECB council member Visco stated that a June rate hike was out of the question, but July was perhaps the time to start. Fellow member Villeroy stated that the inflation fight means normalising interest rates. He added that the central bank’s priority is fighting and mastering inflation. Bundesbank head Nagel said negative interest rates are a thing of the past and added that more rate hikes could come in quick succession. There are strong expectations that the ECB will raise rates at the July meeting with yield expectations underpinning the Euro. There were, however, also growth concerns with Visco also stating that the Euro-zone faces a moderate recession which could get worse depending on circumstances.

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After little change into Friday’s New York open, Treasuries posted net gains after the US open and held net gains even when Wall Street indices rallied. There were no further comments on monetary policy and interest rates from Fed speakers during Friday with strong expectations of a further 50 basis-point hike in June. The latest developments in China caused fresh reservations with Beijing reporting a record number of cases which reinforced lockdown fears.

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