IFX Market Report: Wednesday 11th May 2022

After the Fed increase of interest rates by half-a-percentage point last week, the market saw the US Dollar gain against GBP and EUR. Cable fell to a two year low as the rate went from 1.2625 to 1.2325 as the Federal Reserve aims to fight inflation.

Core CPI figures for the US this afternoon might have an impact as the government is expected to report that consumer prices jumped 8.1% last month compared to last year. A figure that is lower than the 8.5% increase for March and that might be a sign that consumer inflation might be at a stall, and therefore strengthening investors confidence in the USD.

GBP/EUR declined sharply last week, falling to a 6-month low of 1.1673. The fall was driven by growing fears of recession in the UK, which increasingly put into question the Bank of England's rate hike cycle, as rate hike expectations continue to rise in the eurozone. At its last monetary policy meeting, the Bank of England maintained its growth forecast for this year at 3.75%, but now expects the UK economy to contract by 0.25% in 2023, compared to an expansion of 1.25% previously due to inflationary pressures, the war in Ukraine and health restrictions in China. As a result, traders cut their expectation of a BoE rate hike this year by 25 basis points. They now expect three more rate hikes by the end of the year, up from four previously.

On the other hand, expectations of an ECB rate hike are increasing, due to the increasingly bellicose change of tone of central bank officials to counter historic inflation. The influential governor of the Banque de France deemed it reasonable that the key ECB rates return to positive territory by the end of the year, which would be a first since 2015, while Isabel Schnabel, member of the executive board, insisted on the "need to act" on inflation. Market participants now expect key ECB rates to rise by more than 100 basis points by the end of the year, with the first 10 basis point hike expected in the month. next.

Cable continued going down on Tuesday amidst a stronger Dollar and ahead of the Core CPI figures for April.

GBPUSD opened at 1.2339 and closed slightly under 1.2315.
GBPEUR increased slightly yesterday. The pair opened at 1.1660 and closed at 1.1691.
EURUSD on the other had small losses with the pair opening at 1.0553 and closing at 1.0532.

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