May 13, 2022

“The US Dollar Index edged lower on Friday but remained near a 20-year high – with the Federal Reserve seen as one of the most aggressive of the world’s central banks in combating soaring inflation, risk-averse investors are flowing funds into dollar accounts.”

Tim Hallinan – Trading Director

Main Headlines

Federal Reserve chair Jay Powell has warned that bringing inflation down to the US central bank’s target of 2% will cause “some pain”, adding that tackling high prices without triggering job losses and a recession may depend on factors outside of its control. The remarks from Powell, which constitute some of his most bearish comments to date, come amid significant uncertainty about the economic outlook, as the Fed begins what is likely to be the fastest tightening of monetary policy in years. The central bank has raised rates by 0.75 percentage points from the near-zero levels that had been in place since the early days of the coronavirus pandemic, having implemented a half-point rate rise just last week. The moves are part of its plans to “expeditiously” shift policy to a neutral setting that no longer stimulates demand. The US Senate confirmed yesterday that Jerome Powell will remain for a second term as head of the Federal Reserve, amidst the central bank’s fight to crush soaring inflation.

Senior Conservative MPs have turned on the Bank of England (BoE) over its handling of inflation, in a rare outbreak of political criticism of the central bank in the way it is doing its core job. Boris Johnson’s party is feeling the political heat as the cost-of-living crisis intensifies and now some Tory MPs are blaming the BoE, which has been operationally independent for 25 years, for losing its grip on prices. Liam Fox, a former cabinet minister, told the Commons that the BoE had “consistently underestimated the threat” of rising inflation, which the BoE fears could top 10% later this year. “The BoE persisted beyond any rational interpretation of the data to tell us that inflation was transient, then that it would peak at 5%,” he said. Direct criticism of the BoE in its core mission of inflation control from MPs in the governing party has been almost unheard of in the 25 years since the central bank was given independence to set interest rates.

GBP

Sterling is well bid against most major currencies overnight. Boris Johnson has demanded his cabinet comes up with a plan which could cut up to 91,000 civil service jobs to free up cash to tackle the cost of living. It is understood the PM wants to see civil service staffing levels drop to 2016 levels. Government sources suggested the plan is about cutting people not needed and it could save £3.6 billion a year. Ministers have delayed a long-promised enterprise strategy that would have set out plans to drive growth and boost private sector investment in the UK as it emerged from the coronavirus pandemic – business secretary Kwasi Kwarteng has been working on the plans to encourage entrepreneurship and support small business expansion since last summer to address concerns that the British economy had become too dependent on state subsidies after Covid hit two years ago. The enterprise strategy was seen by officials as part of the plan to replace the industrial strategy, which despite business sector support was killed off by the government last year.

EUR

The euro is stronger against the dollar and weaker against sterling this morning. The Swiss government on Thursday reported 6.3 billion Swiss francs ($6.33 billion) worth of Russian assets frozen under sanctions to punish Moscow’s invasion of Ukraine, a drop from early April as around 3.4 billion francs in provisionally blocked assets were released. They have been accused of enabling Putin, but Switzerland have insisted that they cannot freeze funds without “sufficient grounds” and have rejected the accusations “in the strongest possible terms.” Swiss banks hold up to $213 billion of Russian wealth, Switzerland’s bank lobby estimates, with its two largest lenders UBS and Credit Suisse each holding tens of billions of francs for wealthy Russian clients. Estonia, Latvia, and Lithuania have hailed Sweden and Finland’s expected accession to NATO as dramatically improving their own security and ability to repel any attack from Russia and have stated that they would seek to ratify any membership application from Finland and Sweden as quickly as possible.

USD

The dollar is weaker than most major currencies in the early morning trade. US climate envoy John Kerry has warned the world not to go back to coal as it tries to wean itself off Russian gas, saying the war in Ukraine should not be an excuse to delay climate goals. Global energy prices have soared since Russia’s invasion of Ukraine in February, and many countries have said they will have to increase their coal consumption this winter due to lower Russian gas supply. Four Democratic lawmakers on Thursday asked the CEOs of YouTube, TikTok, Twitter and Facebook owner Meta Platforms Inc to archive content that could be used as evidence of suspected Russian war crimes in Ukraine. Ukraine and the West say Russian troops have committed war crimes in its 11-week invasion of its neighbour, in which thousands of civilians have been killed. Facial recognition is making a comeback in the United States as bans to thwart the technology and curb racial bias in policing come under threat amid a surge in crime and increased lobbying from developers.

Markets

Stocks and US futures rose Friday after Federal Reserve Chair Jerome Powell pushed back against speculation of steeper interest-rate hikes. Risk sentiment was boosted by a rebound in cryptocurrencies. Contracts on the S&P 500 gained 0.7% and those on the Nasdaq 100 climbed 1.3%. The Stoxx Europe 600 index rose 0.6% as the lowest valuations since the start of the pandemic drew buyers. An Asian share gauge climbed 1.7%, aided by rallies in Chinese technology stocks and in Japan. The 10-year Treasury yield was 3 basis points higher. A dollar gauge dipped but remains on course for its longest streak of weekly gains since 2018. Treasuries gave back some of their recent rally, with yields rising across the curve. The yen retreated. In Beijing, officials denied the city will be locked down. Shanghai said it plans to achieve “no community spread” of the virus by mid-May. Abating panic in the highly speculative cryptocurrency market was one of the highlights of a risk-on environment on the last day of the week. Bitcoin added about $1,800 to top $30,000.

Main Economic Data/Central Banks/Government (All Times CET)

8:00 a.m.: Norway 1Q GDP
8:45 a.m.: France April CPI
9:00 a.m.: Spain April CPI
10:10 a.m.: ECB’s Centeno speaks
11:00 a.m.: Euro-Area March industrial production
2:30 p.m.: US April import price index
5:00 p.m.: ECB’s Nagel speaks
5:00 p.m.: Fed’s Kashkari speaks
6:00 p.m.: Russia April CPI
6:00 p.m.: ECB’s Schnabel speaks
6:00 p.m.: Fed’s Mester speaks
7:00 p.m.: Baker Hughes US rig count

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