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Inflation continues to dominate proceedings

Monday 23 May, 2022

Daily Currency Update

Last week saw UK inflation reported at an annualised 9% for April. This is a 40-year-high, as food and energy prices continued to spiral after the U.K. energy regulator increased the household energy price cap by 54% at the start of the month. When inflation has previously been heading up to these levels, interest rates in the UK were in double digits. However, the Bank of England remains between a rock and a hard place as growth remains very sluggish in the UK. Households feel the squeeze of rising prices, the bank is wary about increasing the mortgage burden by increasing interest rates too quickly. However, with the sheer relentless rise in inflation, the market may be forecasting that the Bank of England will have no choice but to hike rates and control inflation, and with it the pound has been strengthening last week.  

Key Movers

German inflationary data for April came in higher than expected last week. The monthly reading rose by 2.8%, higher than 1.4% foreseen, while annually based expanded by 33.5%, higher than 31.5% estimated. The data supports the hawkish pivot by some European Central Bank members of late, who have expressed that the central bank needs to get above 0%. ECB President Christine Lagarde has hinted at a first increase in interest rates in more than a decade may come in July, but downplayed the idea of a half-point move amid concerns about economic expansion. Eurozone Consumer Confidence Index rose from -22.0 in April to -21.1 in May. This was slightly better than the small expected rise to -21.5, but still left the index close to multi-year lows. EU consumers struggle with surging energy-driven inflation, a slowing economy and uncertainty with war raging close to its borders in Ukraine. This could possibly derail the ECB's path in the coming weeks. Reports during the weekend announced that Shanghai's central Jing'an district, a key commercial area of the Chinese financial hub, will require all supermarkets and shops to shut and residents to stay home until at least Tuesday. After recent lockdowns in Beijing and Shanghai seen by the markets as a risk off sentiment, this could be perceived by the market as the same. Safe haven assets such as the US dollar are performing well again from the moves.

Expected Ranges

  • GBP/USD: 1.2465 - 1.2580 ▼
  • GBP/EUR: 1.1780 - 1.1865 ▲
  • GBP/AUD: 1.7560 - 1.7765 ▲
  • EUR/USD: 1.0580 - -0.9355 ▲