May 31, 2022

Daily Report 31/05/2022

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The latest YouGov survey recorded an increase in UK inflation expectations for the year ahead to 6.1% from 6.0% and equalling the record high while long-term expectations held at 4.2%. The data will maintain pressure for the Bank of England to tighten monetary policy in order to curb inflation expectations. There were still important doubts whether the bank would be able to match the scale of rate increases by the Federal Reserve and ECB over the next few months. Overall risk conditions held steady which helped underpin the UK currency, although overall sentiment remained fragile The latest Lloyds Bank business confidence data recorded a net gain for May which will provide some relief, but overall confidence in the economy remains negative. Sterling retreated against the firmer dollar with the Euro little changed. Markets will be wary of choppy trading later on Tuesday due to month-end position adjustment with risk appetite and political developments also under scrutiny during the day as pressure on Prime Minister Johnson continues to increase gradually.

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Euro-zone industrial sentiment dipped to 6.3 for May from a revised 7.7 previously while there was a slight improvement in services-sector confidence to 14 from 13.6. Overall business and consumer confidence improved marginally to 105.0 from a revised 104.9 in April.   German consumer prices increased 0.9% for May with the annual inflation rate strengthening to a fresh post-unification record high of 7.9% from 7.4% and above consensus forecasts of 7.6%. Inflation has also been equal to or above market expectations for the past 8 months. ECB chief economist Lane stated that the central bank should increase interest rates by increments of 25 basis points in July and September and that it was appropriate to end negative rates by the end of the third quarter. The rhetoric was in line with market expectations. At this stage, there is clear evidence that key ECB officials are opposed to a rate hike of 50 basis points at any individual meetings, limiting scope for further Euro buying. There were also reports that ECB officials are opposed to intervention to support the Euro even if there is a slide below parity against the dollar.

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10.00 HICP (YoY) (May) Exp. 7.7% Prev. 7.4%

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Monday was a US bank holiday so there were no data releases. Fed Governor Waller stated that inflation is alarmingly high and that he backed raising interest rates by 50 basis points at several meetings and until inflation comes closer to the Fed’s 2% target. He added that the policy rate should be above neutral by year-end. These comments were stronger than the Fed consensus view.

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