Daily Brief

Yellen testifies

…that she is worried about inflation

The latest Congressional testimony from Janet Yellen, saw the US Treasury Secretary evidence the ongoing challenges to the U.S economy. In particular the ‘unacceptable levels of inflation’, coupled with headwinds from supply chain snags, were highlighted by Yellen. In relation to her department, she mentioned that an appropriate budgetary stance would be needed to compliment the Fed’s rate hikes, in order to dampen inflation without undermining the strength of the labor market. As always, Yellen’s comments were sensible and considered.

What did the markets think?

Cautious optimism is a phrase that springs to mind. That balanced ‘goldilocks’ labor report last week has left markets felling much more optimistic that the Fed might just engineer a soft landing for the U.S economy. So, whilst Asian markets got all worked up by that big rate hike from the RBA a little earlier in the day yesterday, once the sun rose in London, much of the declines were at least partially reversed, and Yellen’s testimony probably helped to calm the nerves a little more.

Risk-on (again)

The choppy sentiment continues, with yesterday seeing risk-sensitive assets making something of a recovery, with the likes of the Nasdaq eroding earlier Asian-induced declines. The dollar Index (DXY) had a rare sideways day, with the greenback continuing to set multi-year records against the Yen, this time being at 133.30. On that pair, we are now firmly back in verbal intervention territory, so the dollar bulls will need to strap themselves in from here, at times. However, elsewhere in the dollar mix, USD/CAD continues to benefit from that powerful combination of high oil prices and a strong Canadian economy. The pair has now slipped to just above 1.2500, a mere 100 pips above the yearly low, reflecting the Loonie’s strength.

Employment, growth and then the ECB

Whilst the single currency has maintained a fairly low profile so far this week, all of that is likely to change over the next day or so. The latest Employment data for the region is due this morning, and a steady 2.6% (YoY) level is anticipated. At the same time, the latest growth figures will be released. These are the ones to watch. At the moment, markets anticipate a 0.3% (QoQ/Q1) print, and we should see annual growth somewhere around 5.1% (YoY). Given the close proximity of the GDP report to Thursday’s ECB meeting, any variation from expectation will likely be pounced on by markets. As we said at the top, EUR/USD has remained in a holding pattern around the 1.0700 region in the meantime.

A confident pound

Sterling shook-off any nerves surrounding PM Johnson’s vote of (slight) confidence, and blasted back to 1.2600 (1 week high) before settling a smidgeon lower overnight, having been as low as 1.2430 in the midst of the Asian wobbles earlier. There was a surprise upside adjustment to the Final Services PMI, which reached 53.4 during May, against an expectation of around 51.8 – which was the ‘flash’ reading for last month. Despite the better number on the day, the broader recent drop in the PMI has intensified worries over an imminent recession in the UK. Back to GBP/USD, and any break over 1.2670 in GBP/USD would take the pound to levels not seen since the end of April. GBP/EUR also got the memo, eroding all of the previous day’s declines, reaching a top near 1.1800.

UK House Prices

The latest Halifax House Prices (MoM/Apr) have just been released this morning, and there was a pleasant upside surprise, with a 10.5% (YoY/3M/May) gain versus an expected level of 10.1%.

 

What else is happening today?

EUR – Employment. French Current A/C, Exports, Imports and Trade Balance

USD – MBA Mortgage Applications, Wholesale Inventories, EIA Crude Oil Stocks

GBP – RICS Housing Price Balance

JPY – Foreign Bond Investment, Money Supply.

CNY- Exports, Imports & Trade Balance

 

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