Market Report : 21.06.23

Published: 21/06/2023 By ECAP

Sterling rose this morning as UK inflation defied expectations that it would slow and remained at 8.7% in May. This puts yet more pressure on the Bank of England a day before it is forecast to raise interest rates for the 13th time in a row. The latest figures make British inflation the highest of any major advanced economy once again as a key measure of underlying price growth rose to its highest since 1992, prompting markets to increase their bets on rate rises. Ultimately, the BoE is widely expected to raise interest rates to 4.75% from 4.5% tomorrow. Moreover, following this morning’s data, markets have now fully priced in interest rates reaching 6% by December – i.e., another 150 basis points – up from around a 50% chance of such a move since yesterday.

The Euro declined against the US Dollar in early European trade for the fourth straight session amid active profit-taking. The bloc’s single currency rose against its peers following the ECB's meeting last week and the bullish remarks by ECB President Christine Lagarde. The Euro hit five-week highs as the ECB hiked interest rates for the 8th straight time, reaching their highest level in 22 years, and on strong prospects for further interest rates hikes in Europe at the July and September meetings. Ultimately, the Euro could see further movement on more speeches from ECB members as a continued hawkish rhetoric could inspire EUR investors.

The US Dollar steadied in early European trade this morning ahead of Federal Reserve Chair Jerome Powell's appearance before Congress. In fact, the Dollar Index edged higher to 102.18, trading just above its recent one-month low. On that note, the dollar received a boost yesterday with the release of surprisingly strong US housing data, as housing starts surged 21.7% in May, much more than expected. However, gains were limited as there wasn’t the corresponding jump in building permits and traders were reluctant to commit strongly ahead of Powell’s congressional testimony. Ultimately, the Federal Reserve paused its year-long rate hike cycle last week, but also flagged the potential for more increases in rates later in the year, and thus Powell’s comments will be studied carefully for more cues on monetary policy.