IFX Market Report: Thursday 26th May 2022

Fed Minutes from May meeting show the central bank is considering a more hawkish stance on interest rates. The officials discussed the possibility of adopting a more “restrictive” policy as inflation roars. However, this would mean more aggressive interest rates increases, which could in turn undermine the strong recovery in the job market in the US after a bad start of the year. The Fed is expected to increase interest rates by 50 basis points in the next couple of meetings, the goal being of trying “to bring down inflation without triggering a recession” as Fed chair Jerome Powell states.

Several more dovish officials pointed out the risks involved for the liquidity of market for Treasury securities and to the private sector’s intermediation capacity, or in other words, the private sector’s capacity to leverage savings to lend to borrowers.

The Russian ruble strengthened above 56 against the dollar on Wednesday for the first time since 2018, and hit a seven-year high against the euro, as export-focused firms sold foreign currencies to pay their taxes and that traders shrugged off the expiration of a key debt payment license. The United States said on Tuesday it would not extend a key waiver, which expired on Wednesday, that had allowed Russia to pay US bondholders. The move could push Moscow to the brink of default, as Washington increases pressure on the country over its actions in Ukraine. The Russian currency has strengthened by around 30% against the dollar this year, despite a major economic crisis in Russia, making it the best performing currency in the world. It is guided by capital controls imposed at the end of February to protect the Russian financial sector. The ruble touched 55.80, its strongest quotation since February 2018.

In the United Kingdom, The Chancellor of the Exchequer of the Exchequer, Rishi Sunak, is set to announce today a £10bn plan as emergency aid for soaring household energy bills. Ofgem, the energy regulator, said this week it expected the energy price cap to rise from £800 to £1,971 in April, to about £2,800 in October. An increase of £1,500 for households in just a year. Soaring energy prices were already the main driver for the high inflation increase observed in April, and further increase could hurt the United Kingdom’s efforts to fight inflation and affect consumption.

European stock markets opened at breakeven, trading in low trading volumes due to a public holiday and after the release of reassuring but unsurprising US Federal Reserve meeting minutes. In early trading, the Paris Stock Exchange was stable (+0.05%), as was London (+0.04%). Frankfurt advanced by 0.13% and Milan by 0.14%.
Cable saw some gains yesterday as core durable goods orders for April in the US came out with disappointing results. GBPUSD opened at 1.2485 and close slightly under 1.2576.
GBPEUR remained stable yesterday as the pair opened at 1.1743 and closed to 1.1757.
EURUSD followed a similar trend with the pair opening at 1.0654 and closing at 1.0680.

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