Improved mood helps sterling off lows against Euro, Dollar
Sterling recovered some of the losses that followed the poor PMI data on Tuesday as better risk conditions and rising global stock markets indicated an improved investor sentiment and offered a brief period of respite for those looking to sell GBP. The Pound was supported below 1.2500 against the dollar and recovered to 1.2550 ahead of the Fed minutes with the Euro retreating sharply to just below 1.1765.
Bank of England chief economist Pill stated that further interest rate increases are needed, but he added that too much tightening would increase the risk of deep recession which would be very costly; maintaining market doubts over the scope for any more than limited rate hikes. Bank of England external member Tenreyro also stated that the bank faces a fine balance when setting rates.
Overnight, minutes from May’s Federal Reserve policy meeting confirmed that all participants backed a 0.5% rate increase and most backed further 0.5% hikes at the next two meetings with the central bank needing to move quickly to neutral. The minutes also noted that inflation risks were skewed to the upside and policy may need to be restrictive, although there was a high degree of uncertainty. Participants also noted that the Fed should assess risks to the economy later this year.
Markets are expecting Chancellor Sunak to announce a £10Bn plus support package today to ease the cost of living crisis. This should provide an element of support for the economy and could give the Bank of England increased scope for higher interest rates.