Market Report : 19.05.23

Published: 19/05/2023 By ECAP

Sterling continues to be undermined by expectations that fewer rate increases by the Bank of England will be needed in the coming months to bring down inflation. The bets were lifted by rather unimpressive UK jobs data released on Tuesday and less hawkish remarks by BoE Governor Andrew Bailey on Wednesday. During a speech at the annual British Chamber of Commerce Conference, Bailey said that there were some signs of a cooling of inflation and that the labour market is loosening a little. However, Bank of England policymaker Jonathan Haskel is due to speak later today and could provide sterling with a lift if he confirms that last week's 12th rate rise was not the last as the labour market remains tight and inflation far too high.
The Euro bounced off the previous session’s seven-week low against the US Dollar after German producer prices for April came in stronger than expected. Germany’s PPI rose 0.3% on the month in April, compared with the expected fall of 0.5%, while the annual figure climbed 4.1%, ahead of the forecast 4.0%. This, in turn, has added to the expectations of more interest rate hikes by the European Central Bank. However, although European Central Bank policymakers have been striking hawkish comments, thus far it has had a limited impact on the Euro. Nevertheless, ECB’s De Guindos stated that though most of the tightening is done there is still scope for further hikes. Looking forward, his colleague Isabel Schnabel is scheduled to speak later in the day and is likely to offer up another hawkish message about raising borrowing costs until core inflation declines sustainably.

The US dollar edged lower in early European trade this morning but remained near a two-month high as strong labour data and optimism that a US debt default can be avoided pointed to the Federal Reserve retaining a tight monetary policy for longer. The Dollar Index, dropped 0.2% to 103.27, just below yesterday’s two-month high of 103.63. Nevertheless, the dollar index is on course to record gains of just under 1% this week as news of constructive talks to end the current debt ceiling impasse in Washington raised optimism that a deal can be reached, thus avoiding a damaging debt default. This has put the spotlight firmly back on the Federal Reserve and what it will decide over future interest rate moves. Ultimately, Fed fund futures prices show a 33% chance that the Fed could raise rates by another 25-basis points next month, compared with just about a 10% chance a week ago.