Market Update

US Dollar strength continues to be the theme of May after another high release of Inflation data for April bringing the U.S inflation to 8.3%. The figure was lower than the release in March but still higher than expectations, meaning the aggressive rate approach from The Fed Reserve looks set to remain. As it stands the market is fully priced in for at least a 50 bps hike in each of the next 2 meetings, on June 15th & July 27th. The current state of play on the markets see’s GBP/USD now below 1.22 (now more than a 12 month low) and EUR/USD back below 1.05.

The EUR had initially bounced back above 1.05 yesterday after The European Central Bank raised expectations for rate hikes to begin this summer, notably July. The start of several rate hikes this year for the first time in well over a decade. Markets are now pricing in rate hikes worth 90 bps between now and the end of 2022, with expectations suggesting a combination of 3-4 hikes in increments of 25 bps. Although it should be noted that The ECB are focused on economic releases across the rest of May and throughout June, before cementing on when the first hike should take place.

Another factor leading to GBP/USD dropping below 1.22 was the poor GDP figures in The UK. The data release shows that the economy grew by a meagre 0.8% in the first quarter, which is below expectations of growth of at least 1%. The after-effects of the winter wave of Covid, a skills worker shortage along with intensifying increases in the cost of living have all weighed heavily on GDP for The UK. Industrial output also fell for a second consecutive month, almost certainly weakening Boris’s hand as The UK are currently preparing for another round of negotiations with The European Union over the initial Brexit terms. The UK has drafted legislation that would in all essence bring a stop to checks on all goods arriving in Northern Ireland, which remained part of The EU’s customs area under the deal.

Sterling overall has dipped by more than 3% against The USD in the last 4 weeks as economic projections from The Bank of England have looked all doom and gloom, which has been reflected in the lack of retail sales recently. So far The Bank of England have raised rates 4 times within the last 5 months, and are now sitting in a worrying position to try and tackle soaring inflation, with figures released next Wednesday expected to show inflation at a 40-year high of 8.5%.

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