May 26, 2022

Daily Report 26/05/2022

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Bank of England chief economist Pill stated that further interest rate increases are needed, but he added that too much tightening would increase the risk of deep recession which would be very costly. The comments-maintained doubts over the scope for more than limited rate hikes. Sterling moves during the European session were influenced to an important extent by risk conditions with the currency losing ground as equities moved lower. The UK currency again found support against the dollar ahead of the Fed minutes with the Euro retreating sharply.

Bank of England external member Tenreyro stated that the bank faces a fine balance when setting rates because aggregate demand will be depressed and the mandate required the bank to look at the medium-term outlook and avoid actions which cause inflation to significantly undershoot the target. Sterling was resilient despite a dovish slant to Tenreyro’s rhetoric and it traded above 1.2550 against the dollar.
Markets are expecting Chancellor Sunak to announce a support package on Thursday of at least £10bn to ease the cost of living crisis. This will provide an element of support for the economy and potentially give the Bank of England increased scope for higher interest rates.

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Rishi Sunak Speech

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ECB chief economist Lane stated that the increase in household inflation expectations is a concern and it is appropriate to normalise monetary policy. He added that the speed of monetary policy moves after the third quarter will be decided depending on the economy. Council member Knot stated that inflation expectations are at the upper limit of being well anchored and that a 50 basis-point rate hike isn’t off the table. Nevertheless, markets were sceptical that a majority on the council would back such a move and the Euro was unable to gain further support given that expectations have already been adjusted sharply. Overall, the Euro lost ground with a dipped against the dollar leading to further selling interest as Wall Street equity futures retreated and risk appetite was less confident. The Euro steadied ahead of the Fed minutes as US equities moved into positive territory.

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Minutes from May’s Federal Reserve policy meeting confirmed that all participants backed a 50 basis-point rate increase and most backed further 50 basis-point hikes at the next two meetings with the central bank needing to move expeditiously to neutral. The minutes also noted that inflation risks were skewed to the upside and policy may need to be restrictive, although there was a high degree of uncertainty. Participants also noted that the Fed should assess risks to the economy later this year.

The rhetoric maintained the possibility that there could be a pause in rate hikes after July and the dollar edged lower. The Euro edged higher in early Asia on Thursday, but failed to sustain the move and retreated amid slightly lower global equity markets.

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1.30pm Gross Domestic Product Prev -1.4 Exp -1.3