Daily Market Commentary 25th May 2023

Market sentiment continues to tumble, as Debt Ceiling Negotiations (DCN) in the US, stumble. There has been no real progress made, with the Republicans determined to cut the massive deficit/debt spending, while the executive insists on expansive fiscal policy. Time is running out, so the brinksmanship will come to an end, with a cave in the form of a so-called ‘compromise’ likely. The UK inflation fell back to 8.7%, from 10.1%, but nowhere near the expected fall to 8.2%. The big fall was expected, as the same period last year (April 2022), included the pre-subsidised energy crises prices. Core inflation actually spiked upwards, to 6.8%, meaning the inflation crises remains. There will be continued pressure on the Bank of England to raise rates, once again, at their next meeting. The Fed minutes signalled that further rate hikes were data dependent and thus less bullish. The UK inflation news was not enough to boost the GBP, which fell crashed back below 1.2400, while the EUR slipped to 1.0750.

The firmer reserve pushed commodity currencies lower, with the AUD falling to 0.6530, while the NZD collapsed to 0.6100. The cataclysmic fall in the NZD was more a result of the RBNZ actions and narrative, than reserve currency gains. The RBNZ raised rates a further 25 basis points, as expected, but signalled that it may be the end of rate rises. The dovish sentiment on monetary policy was enough to send the KIWI crashing to earth. The Japanese Tankan report was uncharacteristically positive and showed signs of improving sentiment, for the first time this year. It was not enough to arrest the slide in the Yen, which has steadily fallen to 139.00. All eyes remain focused on the DCN’s in the USA.