Tuesday, June 14, 2022

Daily Market Overview

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• Sterling isn’t having its best day. Cable touched its lowest level since March 2020 at 1.2064 and is extensively testing final support (1.2081; 76% retracement on 2020/2021 rally) before the March 2020 low at 1.1412. EUR/GBP rallies from 0.8578 at the open to currently 0.8650 (testing September 2021 high at 0.8658). The pair at last manages to take out the tough resistance zone around the 0.86 big figure. EUR/GBP 0.8699/0.8721 (38% retracement on 2020/2022 decline; Apr 2021 high) lines up as the next topside hurdle. The perfect storm for the UK currency has been in the making for quite some time now. The cost-of-living crisis is a global issue, but UK households were amongst the first to be heavily exposed, eg by the lifting of the energy price cap in April. More of the same will follow in October. This morning’s UK labour market report was strong, but media focused on the big drop in real wages. UK wages rose by 4.1% YoY in April with CPI inflation running at 9% Y/Y. The biggest fall in real disposable income on record (since 2001) doesn’t bode well for the UK economic outlook. A second item at play for sterling weakness is that the drop in real wages complicates the picture for the Bank of England. Especially as governor Bailey and co are an outlier when it comes to their focus. Especially at the Fed, but now also at the ECB, tackling inflation and reanchoring inflation expectations primes even as it comes at an economic cost. The Bank of England is more balanced and doesn’t want to overdo it when it comes to policy normalization in order not to suffocate the economy. It shows in today’s outperformance of UK Gilts against for example German Bunds. We admit that the BoE is already further advanced in its rate hike cycle, but the relative dynamic will start playing in GBP’s disadvantage going forward. Even if the BoE on Thursday conducts its fifth consecutive rate hike and even as GBP money markets take into account a 3.25% policy rate peak early next year. The final accident in the making the UK government’s solo approach when it comes to overturning parts of the Northern Ireland Protocol from the Withdrawal Agreement. The government yesterday published a bill with four unilateral proposals to override the Protocol. The publication of the bill (which still needs approval in Lower and Upper House) was immediately met with fury in Brussels with the European Commission revamping legal action against the UK. The government’s plans by the way don’t only infuriate the EU, but also part of Johnson’s own Tories and the election-winning Irish Republicans of Sinn Fein in Northern Ireland. On other markets, we’ve seen some consolidation: the dollar is a tad softer, stocks try to regain some ground (but lack strength) while the Bund and the Note future are stuck near the sell-off lows.
News Headlines

Swedish inflation hit 7.3% y/y in May. It’s the highest reading in 31 years and was a sharp increase from the 6.4% seen in April. Monthly dynamics came in at a red-hot 1%. CPIF, the Riksbank’s preferred inflation gauge using a fixed interest rate quickened from 6.4% to 7.2% y/y with all but one category showing (strong) monthly price gains. Both measures surprised to the upside (7%). Excluding energy, core CPIF rose to 5.4%, from 4.5%. Today’s numbers raise the odds for the Riksbank to hike by bigger moves than the inaugural 25 bps back in April. Markets consider such a move a done deal at the very least for the June 30 meeting (50 bps) but that has been the case even before the inflation print. EUR/SEK briefly fell (SEK strengthened) to 10.52 before paring gains immediately. The currency pair is currently changing hands around 10.63.
• OPEC expects substantially lower oil demand growth next year as inflation and the (geopolitical) conflicts will hold a tight grip on the world economy. According to preliminary projections, oil consumption would expand by 1.8mln barrels a day, down from the 3.4mln anticipated for this year. To fulfill this demand while also compensating for lost (Russian) output, the oil cartel last earlier this month announced a quicker-than-planned removal of pandemic-era production curbs in July and August. Oil prices continued to rise though, and today is no exception. Brent is adding more than 2% to $124.4/b.

Graphs & Table

EUR/GBP finally takes out the 0.86 big figure

EU 10y swap rate moves beyond 2013 top and approaches 2.5%

EUR/SEK: SEK not impressed by higher CPI print and need for Riksbank to step it up a notch (or two) (or three) (or…)

VIX volatility index: we ain’t there yet

Note: All times and dates are CET. More reports are available at which you may sign up to.

This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.

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