Daily Wrap Up 17 May 2022

17 May 2022 04:38 PM

Sterling surges, stocks rally

Equity markets are enjoying a rally as a bullish mood is dominate on both sides of the Atlantic.  Dealers are content to buy equities even though the same old uncertainties about high inflation, the war in Ukraine, and the prospect of further rate hikes persist. It remains to be seen whether the gains in stocks are a relief rally, or the beginning of a wider turnaround. Given that those problems are yet to be resolved, a sustained rally might be hard to maintain.

Sterling is higher across the board as the UK unemployment rate fell to 3.7%, the lowest level since 1974. Average earnings came in 7%, easily beating the 5.4% forecast. The update speaks to a strong British economy. The impressive wages reading suggests that employers are having to offer more generous salaries to attract staff, and that will add to the UK’s existing inflation woes, which is already at its highest mark since 1990. The Bank of England hiked interest rates four times in five months, and that was largely because of the high CPI rate. Considering today’s data, it seems as if further rate hikes are in the pipeline.  

In the first quarter of 2022, the eurozone economy expanded by 0.3%, ahead of the 0.2% forecast. Klaas Knot of the European Central Bank said a 50-basis point hike in July is possible if inflation persists. The comments from Mr Knot are similar to that of Mr Villeroy yesterday, and the Deputy President of the ECB earlier this month. On the run up to today’s GDP report, there were creeping concerns the bloc could be heading for a recession, but the 0.3% reading has put those fears to bed, and in turn that could pave the way for an interest rate hike in the next few months. The euro is broadly higher.

The brutal fall in the US dollar is down to the stellar rally in the British pound and the euro. Jerome Powell, the head of the Federal Reserve, will deliver a speech later and traders will be listening out for any potential clues about future monetary policy. Last week, the US dollar index hit a five-year high due to speculation the Fed will hike rates several more times this year. In light of the latest UK and eurozone data, traders were quick to drop the US dollar. Gold is being boosted by the fall in the US dollar. Given the sharp decline in the greenback, the upward move in the US dollar is relatively small, and that suggests that demand isn’t that strong.

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