Daily Market Commentary 19th June 2023

The ECB announced a 25 basis point rate rise and ruled out any ‘pause’, signalling a further rate rise will come in July. The hawkish monetary policy reflects the position on yield curve and differentials with the US and UK rates. Inflation in Europe has been falling fast, but remains at extremely high levels. EU inflation fell to 6.1%, from 7%, but core inflation remained at high levels around 5.3%. The choice to fight inflation, rather than pause rate rises, to stimulate growth, is deliberate and the opposite to the Bank of Japan, who persevere with there extremely stimulative pro-growth monetary policy. The Bank of Japan held rates at minus 0.1%, not blinking throughout the inflation crises, although inflation has remained fairly subdued in Japan. The BoJ’s decision did trigger a further sell-off in the currency, which crashed to Yen 141.85. The ECB rate rises pushed the EUR up to 1.0970, while the GBP surged to 1.2850, with UK Gilt yields reaching record highs.

The weaker reserve did little to bolster the commodity currencies, as recessionary fears take over the narrative. The AUD was steady, trading above 0.6850, while the NZD held above 0.6200. Local markets will look closely at the RBA minutes, when they are released Tuesday, to gauge the Central Banks view of economic and monetary conditions. The Bank of England will meet to determine if they will continue to raise rates, which they probably will, considering the rampant inflation. The Federal Reserve Chairman Powell appears in front of Congress this week and this will be monitored closely by markets.