Risk appetite deteriorated further on Monday with increased fears over the global outlook.

Risk appetite deteriorated further on Monday with increased fears over the global outlook. There were also fears over a further tightening of financial conditions which would trigger further deleveraging in global markets.

Wall Street equities remained under heavy pressure with the Nasdaq index sliding 4.3% to 18-month lows.

Atlanta Fed President Bostic stated that 50 basis-point increases are pretty aggressive and that the Fed can stay at this pace with no need for 75 basis-point increases. He added that the Fed Funds rate needs to be in a range of 2-2.5% by the end of 2022.

Markets had priced in close to a 75% chance of a 75 basis-point rate hike at the June meeting, but there has been a slight easing of expectations, especially with the slide in equities.

The dollar posted fresh 20-year highs in early Europe on Monday with support on yield and defensive grounds.

The US currency corrected weaker later in the day and edged lower on Tuesday with a covering of short Euro and Sterling positions having a significant impact while US yields also declined.

Oil prices were resilient last week despite the slide in equities with crude underpinned by supply concerns. Prices, however, declined sharply during Monday with markets fretting over demand conditions, especially in China. WTI slumped close to 10% from intra-day highs to near $100 p/b before staging a limited recovery.

Bank of England MPC member Saunders stated that key measures of longer-term inflation expectations are uncomfortably high and that a process of de-anchoring expectations would be very costly in economic terms. In this context, the bank should lean heavily and the risk of higher inflation becoming embedded and that he wanted to move quickly to a more neutral stance.

He added that an estimate of the neutral rate is between 1.25-2.50%, but he did not back a rate increase of 75 basis points at the latest policy meeting with the choice between 25 and 50 basis points.

Swiss sight deposits increased to CHF750.9bn in the latest week from CHF744.4bn previously. The notable increase for the week suggests that the National Bank had been intervening more aggressively to help push the franc weaker.

The franc was again unable to gain support from the slide in risk appetite with the currency undermined by expectation of higher global yields. The Euro strengthened further to highs near 1.05 while the dollar posted a fresh 26-month high around 0.9965.

The Euro-zone Sentix investor confidence index dipped further in May. Overall confidence in the Euro-zone outlook remained fragile. EUR/USD found support below 1.0500 and secured a limited element of short covering. Lower bond yields eroded the potential for further dollar gains. EUR/USD traded around 1.0570 on Tuesday.

USD/JPY posted fresh 20-year highs at 131.35 before retreating sharply to test support below 130.0 and settling around 130.40.

The Swiss franc posted further net losses as the National Bank stepped-up franc selling. EUR/CHF strengthened to 2-month highs near 1.0500. USD/CHF retreated from 29-month above 0.9950 to around 0.9910.

Sterling drew some protection from short covering after heavy losses, but sentiment remained very weak. GBP/USD found support below 1.2300 to trade around 1.2360. After heavy losses, commodity currencies rallied from intra-day lows as equities attempted to rally.

AUD/USD slumped to 22-month lows near 0.6900 before a recovery to 0.6980 on Tuesday. USD/CAD peaked at 17-month highs near 1.3040 before a retreat to just below 1.3000.

Economic Calendar

Expected Previous
09:00 Italy - Industrial Output YY(MAR) 3.30%
09:00 Italy - Industrial Output MM SA(MAR) 4.00%
10:00 German ZEW Survey (Current Situation) (MAY) -35 -30.8
10:00 German ZEW Survey (Economic Sentiment)(M/M)(MAY) -48 -41
10:00 EUR Euro-Zone ZEW Survey (Economic Sentiment)(MAY) -43

*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.