Daily Market Report - 16/05/2022
Sterling rebounds against the Euro
The GBP/EUR rate rebounded from seven-month lows last week, but is expected to stall around 1.18 – 1.1825, with the main highlights this week expected to be; the parliamentary testimony from the BoE policymakers and a host of UK economic data which is due to be released Tuesday onwards.
Last week Sterling disappointed against the Euro as stock markets and commodity prices fell in reaction to growing investor fears about the global economy, however, the GBP/EUR rate stabilised after Ukraine's national gas pipeline operator suspended some Russian gas shipments to Europe.
This morning it was announced that the ECB hiked 2022 eurozone inflation forecast to 6.1% and blamed the outbreak of war in Ukraine as the catalyst for this. In its latest Spring forecasts, the EC predicts real GDP growth in both the EU and the euro area of 2.7% in 2022, down from 4% forecast three months ago.
Growth is expected to slow to 2.3% in 2023, down from a previous forecast of 2.8% in the EU (and 2.7% in the euro area) and with energy prices having soared this year, inflation is expected to average 6.1% in 2022, and peak at 6.9% in the current quarter (it hit 7.5% in April, the highest rate in the history of the monetary union).
That’s a “considerable upward revision compared to the Winter 2022 interim Forecast” of 3.5% inflation, the Commission says. Inflation is then seen falling to 2.7% in 2023, still over the European Central Bank’s 2% target.
After having recovered toward 1.2300 when the markets re-opened , GBP/USD has lost its momentum and retreated to the 1.2250 area. This could be because while there has been a slight recovery in risk appetite, the market condition are still considered 'risk-off' and this allows the safe haven dollar to find demand.
EUR/USD has gone into a consolidation phase near 1.0400 following last week's decline. A slew of disappointing economic data from China (Retail Sales and Industrial Production) continues to weigh on the euro as investors wait for the European Commission to release its Economic Growth Forecasts.
Moving forward, Eurozone economic forecasts will be critical in the face of imminent recession fears and speculation about the European Central Bank's (ECB) rate hike in July. Should the EC's projections fail to meet the market's pessimistic expectations, the EUR/USD could recover some of its recent losses, given the lack of big US instructions.