Spectrum FX Daily Report
Sterling
Sterling endured a tough day yesterday on lower risk sentiment with the only gain against the Australian dollar amongst the G10 currencies.
BoE Governor Bailey was questioned on the Bank’s financial stability report in the morning commenting that he sees a mixed outlook for risks to UK economy. He also spoke in the afternoon stating that the BoE should not precommit to what they will do and that a range of options are on the table at the next MPC meeting. He added that the UK is facing a very big real income shock and that the Bank needs to assess how much this will bring down inflation.
The British Retail Consortium confirmed that UK retailers reported a 1.3% drop in sales as record high inflation kept consumers from spending on discretionary products and services.
BoE Governor Bailey will be speaking once again this afternoon.
Euro
The euro struggled again today once again the only gain versus the Australian dollar.
Both the German economy minister and Czech industry minister said in a joint statement that they are deeply concerned gas supplies to Europe are being used as a political weapon with deliberate intention to divide EU member states. Concerns that the Nord Stream 1 pipeline may not reopen on the 21st is of focus at the moment as an energy shortage will undermine confidence in the eurozone.
EURUSD rates fell to fresh 20-year lows as markets attempted to test parity early this morning, we've included a chart illustrating this below. The latest ZEW survey on economic sentiment from Germany and the Eurozone is due for release today but even a positive print seems unlikely to support the euro and it seems only a matter of time before we see EURUSD go through parity.
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Talk in the markets is that once parity is breached, we could see a reversal of recent moves as traders who have been shorting the euro could look to book profits before re-adjusting their positions on the euro.
USD
The bid for the dollar continued with the dollar index now climbing into the 108 handle as markets continued to buy into safe havens as risk appetite in markets continues to dwindle on worsening Covid developments in China.
Comments from the commerce secretary that there is “no problem with a strong dollar” also aided the demand for the dollar.
We also had Fed members, Esther George, James Bullard and Raphael Bostic play down the risk of recession and Bostic reiterated his support for another 0.75% rate hike this month.
The Biden administration are trying to alleviate concerns that tomorrow's inflation print for June was probably “highly elevated” and that the reading is “already out of date” as energy prices have already started to fall. Year on year inflation is expected to rise to 8.7% but the administration states that it is “backwards-looking”.
Overall the market is firmly set in its demand for the dollar as risk appetite continues to fall and it seems unlikely that the Fed will deter from its aggressive cycle of tightening monetary policy.
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