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  • richard evans

Central banks to keep raising rates to counter inflation

Good morning

ECB officials have been talking of more rate rises to come, July seems something of a certainty but there is increasing talk that we may see another in September as well in order to deal with inflation, despite the fact economic growth may suffer. In addition, the idea that ECB may cut rates in H1 2024 is looking like less of a possibility. Its not just the ECB of course who need to keep tightening. With UK rates now at 5%, there is plenty of thought we’ll be seeing more rate rises here, 5.5% is likely and as you know some are looking for UK rates to touch 5.75 or even 6%. IMFs Gopinath, speaking at the ECB forum in SIntra, was clear that central banks need to remain committed to fighting inflation.

GBPUSD is currently 1.2745, EURUSD now 1.0935, both a few points higher than this time yesterday, with GBPEUR 1.1655. USDJPY holds gains, now 143.50 which lifts GBPJPY to within a few points of 183.00 and EURJPY to almost 157.00. BoJ remains dovish but the threat of intervention is still lurking in the background. USDJPY is still well below last years highs which came in around 152.00 so there is some thinking that while we may still see a bit of talk from Japan officials, we won’t see any actual intervention. It’s a tough decision but with the carry firmly in favour of yen shorts, further yen losses are likely.

Another high fix in USDCNY, 7.2098 was the fix this morning, although the market was looking for an even higher fix, nearer 7.2200. Some suggestions China state banks were seen intervening in the currency markets by selling UDSCNH, the offshore Yuan. A drop from 7.2495 to 7.2140 overnight gives support to this idea. China equities were positive overnight as China Premier Li said Q2 growth would exceed that of Q1. AUD moved higher in response to this, GBPAUD trading from an overnight high of 1.9055 to 1.8950, although has worked its way back up to almost 1.9000 as I type. Monthly CPI data from Australia will be seen overnight which will perhaps give a clue as to whether RBA will lift rates again in July.

Talk that Yellen is planning a trip to China for early July, as we know the chance of there being any significant ground made in relations is pretty low but meeting and talking is hopefully better than not doing so at all.

News headlines still full of questions over the Russian ‘mutiny’, and whether Putin is now weaker and under pressure or whether this will all be forgotten. The fate of the Wagner soldiers and Prigozhin remains to be seen, but surely no one believes they will be able to walk away with no repercussions. It did occur to me that up until recently the Wagner group were fighting in Ukraine. Have they just stopped that now? I hope this would make the Ukrainian counter offensive a little easier but I obviously don’t know enough about it to really make any assessment.

We’re set for another warm day although the forecast suggests it’ll be several degrees cooler than we’ve become used to recently. Make the most of it though, I see some rain is forecast for the remainder of the week and into July. Crikey, we’re almost at the end of H1 2023. That’s come around quickly…

- 09.00 ECBs Lagarde speaks

- 13.30 US durable goods

- 13.30 CAD CPI

- 14.00 US house price index

- 15.00 US consumer confidence, new home sales

- 02.30 AUS CPI

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