BoE members wary over recession risks.

Minutes from May’s Federal Reserve policy meeting confirmed that all participants backed a 50 basis-point rate increase and most backed further 50 basis-point hikes at the next two meetings with the central bank needing to move expeditiously to neutral.

The minutes also noted that inflation risks were skewed to the upside and policy may need to be restrictive, although there was a high degree of uncertainty. Participants also noted that the Fed should assess risks to the economy later this year.

The rhetoric maintained the possibility that there could be a pause in rate hikes after July.

The US 10-year bond has settled around 2.75% with hopes that inflation will be brought under control. Lower yields limited the scope for dollar gains while Wall Street posted net gains in tentative trading, but futures lost ground on Thursday as overall financial conditions continued to tighten.

ECB chief economist Lane stated that the increase in household inflation expectations is a concern and it is appropriate to normalise monetary policy. He added that the speed of policy moves after the third quarter will be decided depending on the economy.

Council member Knot stated that inflation expectations are at the upper limit of being well anchored and that a 50 basis-point rate hike isn’t off the table.

Nevertheless, markets were sceptical that a majority on the council would back such a move and the Euro was unable to gain further support.

Bank of England chief economist Pill stated that further interest rate increases are needed, but he added that too much tightening would increase the risk of deep recession which would be very costly.

External member Tenreyro stated that the bank faces a fine balance when setting rates because aggregate demand will be depressed and the mandate required the bank to look at the medium-term outlook and avoid actions which cause inflation to significantly undershoot the target.

Markets are expecting Chancellor Sunak to announce a support package on Thursday of at least £10bn to ease the cost of living crisis. This will provide an element of support for the economy and potentially give the Bank of England increased scope for higher interest rates.

The Euro was unable to gain further support from relatively hawkish ECB rhetoric with markets not seeing a 50 basis-point rate hike in July. US data had little impact, but there were underlying reservations over the outlook.

Futures markets slightly downgraded Fed rate hike expectations. The dollar index, however, held above 1-month lows. EUR/USD found support below 1.0650 and traded around 1.0675 on Thursday.

The yen failed to benefit from a dip in US yields. USD/JPY traded above 127.00 and around 127.30 despite reservations surrounding the Chinese outlook.

The Swiss franc maintained a strong tone on speculation surrounding a more hawkish National Bank policy. EUR/CHF was held below 1.0300 with USD/CHF edging higher to 0.9625.

Sterling was resilient despite further BoE warnings not to tighten monetary policy too far. GBP/USD found support below 1.2500 and moved above 1.2550. GBP/EUR rallied towards 1.1770.

Commodity currencies recovered from intra-day lows, but struggled to gain sustained support. AUD/USD fund support below 0.7050, but failed to hold above 0.7100 and traded around 0.7075 on Thursday. USD/CAD retreated from 1.2885 highs and traded around 1.2835 with further support close to 1.2800.

Economic Calendar

09:00Italy - Consumer Confidence(MAY)100.5100
09:00Italy - Business Confidence(MAY)109.00110
09:00World Economic Forum Annual Meetings
13:30USD GDP Price Index (Q/Q)6.90%7.10%
13:30USD GDP (Annualized)-1.40%-1.40%
13:30CAD Retail Sales Ex Autos (M/M)(MAR)2.10%
13:30CAD Retail Sales (M/M)(MAR)0.10%
13:30USD Initial Jobless Claims215K218K
15:00USD Pending Home Sales (M/M)(APR)-1.60%-1.20%

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.