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Market Update

• Posted by currencies in Bank of England, Budget, Dollar, Economy, EUR, Fed, GBP, Inflation, Sterling, UK, Uncategorised
• March 23, 2022
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UK CPI surged to 6.2% for Feb YoY reaching a 30 year high for the pound. As expected, CPI data reaffirmed the consensus of an overheating economy led by energy prices with 8% set as the peak of inflation expected in May and 10% forecasted to be hit around October. PPI data unsurprisingly saw another consecutive beat compared to last month’s PPI print.

Gov Andrew Bailey speaks at noon regarding the state of the economy’s battle against inflation amongst an income squeeze. Cable shed some of yesterday’s gains trading as low as 1.3220 as investors now fear that after two consecutive rate hikes and inflation continuing to rise, monetary policy actions are having little to no positive effect on combating historical inflation levels.

It’s a very busy day for the pound, shortly after Gov Bailey speaks, we have the annual budget release for the UK.

The Chancellor Rishi Sunak will deliver a budget, which will include a £1200 per head increase to service the National Debt.  The Institute of Fiscal Studies (IFS) predicts that debt interest payments could surpass £84B, which would be £31B or 41% more than was predicted back in October.

The Chancellor is under pressure to announce more support for household and businesses, which will be extremely tough given the BoE recently warned that inflation could surpass 10 per cent by the end of 2002, a level not seen since early 1980.  Inflation has a knock on effect on Government borrowing….£500B of the £2.3T National Debt is pegged to the Retail Prices Index.

The IFS predicts that RPI inflation alone will add a further £20B to next year’s debt interest spending, with the recent interest rate hike also further adding to the Government’s borrowing costs.

A change in tonality from Fed Chair Jerome Powell caused a recovery in risk assets yesterday. Leading investment bank Goldman Sachs are now projecting the Fed to raise rates by 50 bps in their next two meetings following hawkish comments from Jerome Powell yesterday.

Powell stated how there is an obvious need to move “expeditiously”, to return monetary policy to its neutral level. The comments caused investors to shine the light on risk assets once again. Capital flowed from the dollar to G7 currencies due to Powell’s comments shifting equities higher and the dollar lower as of a result. Yesterday cable pushed back above 1.3250 level and Euro dollar trading above the 1.1030 level.

Over in Europe President Lagarde’s speech had a muted effect on euro rates, however with the continued slow progression of talks between Ukraine and Russia, as well as a weak dollar, we saw pound euro regain losses from the prior week trading at 1.20. Just 2% below the year high.