Sterling has remained vulnerable in the first half of the week as it continues to bump along the bottom of the range. Ongoing concerns surrounding the economy with regards to the cost of the living crisis were further highlighted by HRH Prince Charles during the Opening of Parliament. In addition, various political commentators have been discussing the risk that, after a poor showing in local elections, the UK government will look to push ahead with a legislative agenda that could be more combative on Northern Ireland trade and the protocol.
Looking to the remainder of the week, on Thursday, 1Q22 GDP is set for release which may start to show the slowdown emerging in March, ahead of what could be a negative quarterly reading in 2Q22 given the removal of the energy cap in April. In the meantime, the market will continue to keep a close eye on Bank of England (BoE) speakers for clues on future policy. Currently, the market still prices the Bank Rate at 2.15% by the end of the year down from circa 2.25%, but this remains delicate.
Dollar remains strong on higher volatility
Risk sentiment continued to impact financial markets early this week due to inflation and growth-related concerns. Subdued market conditions followed comments made by several Fed speakers on Tuesday, in particular, the comments from Cleveland Fed President Loretta Mester grabbed the most attention as she signaled policymakers may continue to consider a 75-basis point hike to curb rising inflation rates as the economy remains in a strong position. The market reaction saw the US Dollar Index continue to trade around the 104 handles and the 10-year US Treasury yield edged lower to 2.95%.
The key economic event this week is the release of US Consumer Price Index (CPI) on Wednesday as concerns about the need for further interest rate hikes remain. Headline inflation is expected to reduce to 8.1% year-on-year in April from 8.5% prior. The Core Consumer Price Index (CPI) reading is expected at 6.1, down from the previous reading of 6.5%. While this would represent some disinflation, it remains far above the Fed’s target inflation rate. Elsewhere today, the market will be paying attention to Atlanta Fed President Raphael Bostic, known for his hawkish views.
Focus turns to Largarde and policy outlook
The Euro remains relatively unchanged in the early part of this week as the stronger Dollar continues to be underpinned due to deterioration in risk appetite. The Single currency continues to trade in the lower end of the range against the Dollar, weighed down by ongoing tensions between the EU and Russia. In economic data releases, the German ZEW survey indicated a further deterioration in economic conditions.
Looking ahead to the remained of this week, several (European Central Bank) ECB officials are also set to speak including ECB President Christine Lagarde, and her comments will be watched for signs of whether a July interest rate rise is on the cards. Lagarde may indicate a roadmap ahead of the next ECB rate meeting for concluding the Asset Purchase Program in the third quarter of this year. The next ECB meeting on 9 June is when policymakers could signal the end of QE in early July and the possibility of a hike soon after.
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