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MONDAY 23/5/2022 – EURO CLIMBS AS ECB EYES RATE HIKES, DOLLAR SLIDES The dollar index fell on Monday while the euro rallied after the European Central Bank indicated a move from negative interest rates, and riskier currencies gained ground along with equities. ECB President Christine Lagarde said in a blog post that the bank was likely to lift the euro area deposit rate out of negative territory by the end of September and could raise it further if it saw inflation stabilizing at 2%. After declining last week, U.S. equities followed European stocks higher on Monday. The euro’s rally came as the dollar fell broadly after already selling off last week. Investors had more appetite for riskier assets on Monday as they reacted to Lagarde’s comments and easing worries that a European recession was imminent while the U.S. outlook looked less inspiring, according to Erik Nelson, macro strategist at Wells Fargo, New York. “We’re seeing more optimism around global growth – European growth, Chinese growth, UK growth, and a little bit less optimism about U.S. growth. So the growth divergence theme is really a big thing and moving out of favor for the dollar,” Nelson said. The euro was the big gainer, last up 1.13% at $1.0687 EUR=EBS , having risen as much as 3.4% from its multi-year intraday low of $1.0349 on May 13. The U.S. dollar index =USD , which had hit a two-decade high of 105.01 on May 13, was last down 0.82% at 102.09. “Investors are still interested in the greenback, but foreign currency pressure to the upside has created a little bit of a headwind for the U.S. dollar,” said JB Mackenzie, managing director of futures and forex at Charles Schwab. In particular, Mackenzie pointed to the euro’s rise after the ECB indication that it would become more hawkish.   TUESDAY 24/5/2022 – STERLING SLIDES AFTER SOFT PMI DATA SENDS A RECESSION WARNING IN THE UK he British pound fell to its lowest level in more than a week against the euro after data showed a sharp slowdown in business activity, adding to concerns that the UK could fall in the recession later this year. S&P Global’s flash Composite Purchasing Managers ’Index (PMI), a monthly measure of the services and manufacturing industries, fell to 51.8 in May from 57.6 in April, its lowest level since February last year. The initial reading was worse than all forecasts in a Reuters poll of economists, which pointed to the drop to 57.0. “The sudden deterioration of growth prospects will come as a massive concern to the Bank of England and will certainly question further rate increases,” said Infinox financial market analyst Richard Perry.   WEDNESDAY 25/5/2022 – STERLING UP VS EURO, FLAT VS DOLLAR AFTER BRIEF ‘PARTYGATE’ DIP Sterling was flat against the dollar and rose against the euro on Wednesday, having briefly lost ground against both currencies following publication of a report detailing COVID lockdown-breaching parties at the office of Britain’s prime minister. A failure of leadership was to blame for a culture that led to the alchohol-fuelled gatherings being held, the report by senior official Sue Gray said. read more After its conclusions emerged, sterling fell as much as 0.4% against the dollar but by 1432 GMT was flat at $1.2530. Against a weakening euro, the pound extended gains to 85.21 pence, or 0.5%. The report was expected to heap further political pressure on Boris Johnson to resign, though betting markets showed his prospects of staying put had improved following the report. He said that, while he took responsibility for the parties, he would not quit. Chances of Johnson being replaced this year had fallen to 28% from 35%, according to London-based betting site Smarkets.   THURSDAY 26/5/2022 – DOLLAR EASES AS TRADERS SCALE BACK BETS ON FED TIGHTENING The U.S. dollar edged lower on Thursday as markets considered whether the Federal Reserve might slow or even pause its tightening cycle in the second half of the year, which would weaken the allure of the safehaven currency. The dollar index , which measures the greenback against a basket of six major peers, was down 0.206% at 101.84 at 3 p.m. ET (1900 GMT). The currency began to weaken after minutes from the Fed’s May meeting, released Wednesday, showed that most participants judged that 50 basis-point hikes would likely be appropriate at the June and July policy meetings to combat inflation that they agreed had become a key threat to the economy’s performance. Many of the participants believed that getting rate hikes in the books quickly would leave the central bank well positioned later this year to assess the effects of policy firming, the minutes showed. “The market is becoming a little bit more optimistic that the Fed won’t be too aggressive with tightening and that some of the sell-off that we’ve seen with risky assets, specifically equities, might have been overdone, said Ed Moya, senior market analyst at Oanda. “That’s prompting a little bit of a rally here.   FRIDAY 27/5/2022 STERLING HEADS FOR SECOND WEEKLY GAIN AFTER UK HOUSEHOLD SUPPORT PLAN Britain’s pound looked set for a second weekly rise and was close to a one-month high on Friday, helped by a large government spending package to support households and which economists said should support the economy in the short term. The government on Thursday announced a 25% windfall tax on oil and gas producers’ profits to help fund a 15 billion pound ($18.9 billion) package of support for households struggling to meet soaring energy bills. Reaction on currency markets was muted, but analysts said signs of government support, which was mostly targeted at lower-income households, could lift sentiment towards sterling which has rebounded this week versus the dollar after falling to a two-year low earlier this month. Sterling’s rebound has also been aided by a broad reversal in the U.S. currency, while the UK currency’s performance against the euro has been much weaker in recent sessions. By 0800 GMT, the pound was 0.1% higher at $1.2618 after earlier reaching $1.2666. It is on course for a 1% gain this week. Versus the euro, sterling was marginally higher at 85.06 pence but that followed a fall on Thursday. “If the passthrough of looser UK fiscal policy… is marginally tighter monetary policy – as a number of forecasters have hinted at – then the current composition of inflation (largely imported) gets leant into by a stronger pound, all else equal,” said Simon French, chief economist at Panmure Gordon.