BoE’s Bailey expects further rate hikes.

The German IFO index strengthened to a 3-month high of 93.0 for May from a revised 91.9 the previous month and comfortably above consensus forecasts of 91.4.

The IFO stated the economy is showing resilience and that there is no sign of recession. The services-sector was more confident on the month, although the situation in the industrial sector was more difficult.  Inflation expectations eased slightly on the month, but, according to the IFO, this was more due to subdued demand rather than easing of supply-side stresses.

ECB President Lagarde stated that the bank was likely to be in a position to exit negative interest rates by the end of the third quarter. She also warned that the pace and scale of monetary policy adjustment could not be determined in advance and the situation is complicated by the presence of negative supply shocks.

The overall rhetoric was, however, more hawkish given the hints of two rate increases during the third quarter and the Euro secured further buying support.

Bundesbank head Nagel focussed on the labour market and stated that it seemed to be clear that wage moderation seen for 10 years in Germany is over.

The Euro and Sterling continued to gain support from short covering while the dollar was again hit by a correction as equity markets held net gains.

EUR/USD posted a 1-month high just below 1.0700 with a further element of short covering in evidence.

Kansas City Fed President George stated that inflation is clearly decelerating, but could jump again and reducing inflation is the top priority. She added that she expected interest rates to be around 2.0% by August.

San Francisco’s Daly stated that the US economy had plenty of momentum and does not expect recession.

Shares in US media company Snap, however, plunged after an earnings warning and comments that the US economy had deteriorated faster than expected in the latest month.

US equity futures dipped sharply after the market close which also sapped overall risk appetite.

Bank of England Governor Bailey stated that the UK has a very tight labour market, but that does not mean that the UK looks like a story about rapid demand growth and he retreated that the economy is facing a very big negative impact on real income.

According to Bailey, the bank is ready for more interest rate hikes if needed.

Trading conditions were more orderly on Monday with less volatility. The stronger than expected German IFO data and hawkish ECB rhetoric supported the Euro. The dollar continued to correct lower on hopes for an inflation peak. EUR/USD posted highs just below 1.0700 before fading to 1.0670 on Tuesday as risk appetite dipped again.

The yen was hampered by gains in equities and expectations of a very dovish Bank of Japan policy USD/JPY consolidated just below 128.00 on Monday before a retreat to 127.60 as equites dipped again.

Speculation over a less dovish National Bank policy continued to underpin the Swiss franc. USD/CHF dipped to lows near 0.9630 before a recovery to 0.9660.

Sterling secured further support from stable risk conditions and short covering. GBP/USD posted net gains to a 2-week peak at 1.2600 before a limited net retreat. GBP/EUR however, found resistance at 1.1854 before dipping towards 1.1770.

Commodity currencies held gains during the day before edging lower on Tuesday as risk conditions dominated. AUD/USD consolidated just above 0.7100 before a retreat to 0.7085. USD/CAD dipped to lows around 1.2770 before trading just above 1.2800 on Tuesday.

Economic Calendar