Daily Wrap Up 23 May 2022

23 May 2022 04:50 PM

Hawkish Lagarde talks euro higher  

Lately there has been growing chatter the European Central Bank might lift interest rates in July, and this morning, Christine Lagarde dropped a big hint that rates will be lifted. Ms Lagarde, the ECB President, said that rates could be brought out of negative territory by the end of the third quarter. Currently, the deposit rate is -0.5%, so such a move would require a hike of at least 50 basis points. The comments from Lagarde have pushed up the euro versus most major currencies. EUR/USD is up over 1%, while EUR/GBP is only up 0.5%. Over one week ago, the US dollar index registered a multi-year high, but since then it has been moving lower. Today’s sharp rally in the euro compounded the dollar’s issues, which is why the single currency has gained so much ground against it when compared with the British pound. Since March, Federal Reserve has hiked rates twice, one of which was a 50 basis points lift, and there is speculation there might another 50 basis points hike next month. Meanwhile, the Bank of England lifted rates four times in five months. CPI in the eurozone is at a record high, and it seems the ECB is keen to not let the interest rate differentials get too great.

The S&P 500 has rebounded from the 15-month low it posted on Friday. The index is up 1.5% but the tech-heavy NASDAQ 100 is only 0.8% higher, the underperformance of the NASDAQ suggests that buying appetite is comparatively weak. Afterall, any painful declines seen in stock markets recently have been NASDAQ led so the fact the market is only 0.8% up on the day does not bode well for the wider environment. Eurozone markets are showing strong gains even though it appears the ECB is now more likely to lift rates in the next few months.

Gold hit a two-week high as the major drop in the US dollar has boosted the metal. The inverse relationship with the greenback continues to be strong as the dollar’s decline in the past week has driven the commodity higher. Industrial metals such as copper and silver are up too.

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