UK inflation hits fresh 40-year high.

In comments on Tuesday, Richmond Fed President Barkin stated that he had thought that a 75 basis-point rate hike was possible at the June meeting after the latest University of Michigan consumer confidence index recorded an increase in long-term inflation expectations to 3.3% from 3.0%. 

He added that there was not much reason to stop raising interest rates if inflation keeps escalating. He added that the Fed will do what it takes to reduce inflation and it should come down, but it will take some time.

US equities posted strong gains on Tuesday, but there was a fresh decline in confidence on Wednesday with futures moving lower.

Weaker risk appetite triggered fresh dollar support on Wednesday with commodity currencies under pressure. 

The yen remained under pressure on Tuesday with USD/JPY posting fresh 24-year highs around 136.70 as the Bank of Japan remained committed to an ultra-loose monetary policy.

Weaker risk appetite and lower oil prices triggered limited yen relief on Wednesday. 

Markets will be watching Fed Chair Powell’s testimony to Congress closely on Wednesday with his rhetoric and guidance having an important impact on rate expectations and moves across all asset classes.

Fiscal policy will also be important with President Biden expected to confirm a cut in gasoline taxes.

The headline UK CPI inflation rate increased to 9.1% for May from 9.0% previously which was in line with market expectations.

There was a slightly larger than expected decline in the underlying rate to 5.9% from 6.2% and below consensus forecasts of 6.0%.

Bank of England Chief Economist Pill stated that he sees further policy tightening in monetary policy with the bank ready to act if there is evidence of persistent price pressures, although he added that the bank faces a narrow path between persistent inflation pressure and recession. 

As far as Sterling is concerned, Pill stated that he was worried that using monetary policy to stabilise the exchange rate in the short term would distract the bank from its goals.

ECB rhetoric has little impact with markets pricing in 75 basis-points of tightening for the July and September meetings combined. US Treasuries lost ground with the 10-year yield increasing to a peak around 3.30% before a retreat. Higher yields continued to provide underlying US dollar support.

EUR/USD strengthened to highs of 1.0580 before a retreat to just below 1.0500 on Wednesday. USD/JPY surged to 24-year highs at 136.70 before a retreat to 136.20 as equities dipped.

The Swiss franc was resilient after last week’s National Bank rate hike. USD/CHF settled around 0.9680 with EUR/CHF declining to 1.0160.

Speculation over more aggressive Bank of England tightening provided some Sterling support, but overall sentiment remained defensive. GBP/USD was unable to hold above 1.2300 and retreated to below 1.2250 while UK headline inflation met expectations.

Commodity currencies drifted from intra-day highs on Tuesday with further losses on Wednesday as risk appetite dipped. AUD/USD retreated sharply to around 0.6920 after failing to hold 0.7000. USD/CAD retreated to 1.2920 before a recovery to 1.2970.

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