Market Report : 28.06.23

Published: 27/06/2023 By ECAP

Sterling lost some ground yesterday, reversing the previous day’s rebound amid mixed catalysts of late. Escalating the fears of higher interest rates at the Bank of England and potential UK recession woes have begun to weigh on the pound. Looking ahead, Bank of England Governor Andrew Bailey (in the same panel with Lagarde and Powell) and Chief Economist Huw Pill will speak in Sintra today, and like in recent circumstances, they are facing the pressure of very aggressive market pricing for BoE tightening. The Sonia curve is pricing in 118-basis points of additional hikes ahead, with a peak rate now seen closer to 6.25% than 6.0%. The question is, once again, whether BoE officials will offer any kind of pushback against those tightening expectations, perhaps to offer some respite to the troubled UK mortgage market. Ultimately, the speech will be closely watched as major attention will be given to UK recession woes, which in turn could dictate sterling’s price action for the rest of the week.

The Euro strengthened yesterday after conversations with seven rate-setters at the ECB's annual forum in Sintra, Portugal, showed most expected to increase borrowing costs again at both the July and September meetings despite signs the euro zone economy is flagging. In fact, of a group of policymakers who have consistently called for rate hikes in the last year, only one, speaking on condition of anonymity, opened the door to a pause in September after recent data showed inflation and economic activity slowing. The others, speaking on or off the record, said a hike at the ECB's Sept. 14 meeting, taking the deposit rate to 4%, was more likely than not as measures of underlying price pressures remain elevated. Ultimately, the ECB raised its interest rates to their highest level in 22 years this month and said a ninth consecutive rate hike was all but guaranteed in July as it predicted inflation would stay above its 2% target through the end of 2025.

The US Dollar index retreated yesterday after a host of economic data releases indicated the US economy remains resilient and is not close to a recession. The greenback retreated after data showed that new orders for US manufactured capital goods unexpectedly rose in May, although the prior month was revised down, indicating some caution remained among businesses for new capital investment. Nevertheless, the dollar pared declines somewhat after a separate reading on consumer confidence showed its index rose to 109.7 in June, the highest since January 2022. Ultimately, there is no indication that a US recession is coming as none of the economic data or statistics evidence this.