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Daily Market Comment - Sterling rises after UK Prime Minister elections, Euro rises again 06/07/2022

Daily Market Comment - Sterling rises after UK Prime Minister elections, Euro rises again 06/07/2022

Daily Market Comment - Sterling rises after UK Prime Minister elections, Euro rises again 06/07/2022

 Sterling rises, supported by Liz Truss plans that may escalate inflation

The euro is also rebounding after hitting its lowest level in two decades.

The Reserve Bank of Australia raises interest rates by 50 basis points and indicates neutrality.

Asian stocks supported by the Chinese government's pledge to take more aggressive measures to boost the economy.

Sterling rises after Liz Truss wins election for new UK Prime Minister.

The US dollar fell briefly yesterday, as the dollar index fell after hitting a two-decade high at 110.23. It seems that the currency that benefited most from the dollar’s ​​decline was the pound sterling, as its traders rushed to enter into buying deals after the currency recorded a new low in two and a half years at 1.1443 and then rose after the announcement of the victory of the Minister of Foreign Affairs - Liz Truss - in the Prime Ministerial elections in the United Kingdom .

The market reaction at the time of the announcement was muted, but that coolness quickly turned into celebration once Liz Truss confirmed plans to cut taxes and tackle higher energy bills in her post-win speech. However, in purely economic terms, if these measures are actually implemented, inflation is likely to rise, and therefore the BoE will come under more pressure to raise rates at a faster pace.

Expectations that the Bank of England may raise rates at a faster pace may provide support for the Pound in the near term, but if the Bank cannot keep up with those expectations due to recession fears, this situation will disappoint the markets and thus the Pound could see another sell-off. After all, sterling traders seem concerned about the imminent threat of a recession, and the Bank of England's cautious approach to a recession - even with inflation likely to rise above 10% - could contribute to escalating recession fears.

The euro is witnessing an appetite for buying before the European Central meeting, and the Australian Reserve indicates neutrality

The Euro also managed to recover yesterday, after hitting a two-decade low of 0.9877, affected by Russia's decision to stop pumping gas to Europe indefinitely. Thus, European stocks witnessed severe pressure throughout the trading sessions at a time when concerns are increasing about the possibility of a worsening of the energy crisis, which suggests that the recovery of the euro was due to the rush of traders to close short positions before the European Central meeting on Thursday, as markets expect the European Central to raise interest rates at a rate 75 basis points.

This week's central bank meetings have already started during the Asian session today, as the Reserve Bank of Australia headed for a 50bp rate hike in response to the expectations of most market participants. At the same time, officials did not indicate further “tightening” in their statement, which suggests that this may be a hint that the cash rate is now in neutral territory. Although they seem ready to proceed with monetary tightening, this only adds to the credibility of expectations that the RBA may not need to move aggressively from today onwards. Perhaps this is the reason for the initial tepid reaction to the Australian dollar. However, with no clear indications as to what path policy makers will take going forward, the currency recovered slightly to approach pre-decision levels before experiencing a renewed sell-off later.

Asian stocks rise, boosted by Chinese government promises

Although European stocks fell yesterday, the situation was different today for Asian stocks, with the Chinese Shanghai Composite Index rising significantly after Chinese policy makers promised a renewed effort to revive the ailing economy.

However, given that the world's second largest economy continues to be under pressure from the deteriorating real estate sector and the resurgence of the Covid-19 virus, as well as the hawkish sentiments of most major central banks in this monetary tightening cycle, it may be difficult for anyone to convince China will provide support to global stocks and other risk-sensitive assets.

This may be illustrated by the performance of oil prices, as oil prices rose slightly yesterday after OPEC + decided to cut production by 100,000 barrels per day in October, but the fact that the gains were limited and short-lived indicates that demand concerns remain high, and risks China is one of the main reasons why these concerns exist.

Gold traders also benefited from the dollar's decline, which pushed the precious metal higher overnight. However, a reversal of the prevailing bearish trend seems unlikely at the moment, especially when US yields resume their recovery today after yesterday's holiday.