The ECB will likely start raising interest rates shortly

USDINR: 77.58 ▲ 0.01%.

GBPUSD: 1.2419 ▼ 0.57%.

EURUSD: 1.0523 ▼ 0.23%.

India 10-Year Bond Yield: 7.355  ▼ 0.15%.

US 10-Year Bond Yield:  2.999  ▲ 0.97%.

Sensex: 54,208.53 ▼ 0.20%.

Nifty: 16,240.30 ▼ 0.12%.

Key highlights

British inflation surged last month to its highest annual rate since 1982, pressuring FM to offer more help for households and the BoE to keep raising interest rates despite the risk of recession. CPI hit 9% in April, surpassing the peaks of the early 1990s recession that many Britons remember for sky-high interest rates and widespread mortgage defaults.

The ECB will likely start raising interest rates shortly after ending its bond-buying programme early in the third quarter, with the potential for further hikes in coming quarters, policymaker Pablo Hernandez de Cos said. 

S&P Global Ratings cut India's growth projection for the current fiscal to 7.3% from 7.8% earlier on rising inflation and the longer-than-expected Russia-Ukraine conflict. In its Global Macro Update to Growth Forecasts, S&P said inflation remaining higher for a long is a worry, which requires central banks to raise rates more than what is currently priced in, risking a harder landing, including a larger hit to output and employment.

USD/INR movement

The USDINR pair opened flat at 77.55 levels. The pair traded in the range of 77.47-77.60. and closed the trading session at 77.58. The USDINR pair settled slightly higher tracking firmness in the dollar index on expectations for a more aggressive policy tightening by the Federal Reserve. The strong dollar and elevated crude prices also supported dollar demand today. However, major gains in the pair were capped as the RBI is believed to have protected the 77.50 levels. The markets seem convinced that the US central bank would need to take more drastic action to bring inflation under control. The bets were reinforced by Fed Chair Jerome Powell's remarks at a Wall Street Journal event yesterday.

Global currency updates

The euro traded lower against the US dollar tracking the strong dollar following Fed Chair Powell's hawkish comments. Eurozone’s Inflation rose 7.4% in April, on an annualized basis, according to Eurostat’s final reading of the Eurozone Harmonised Index of Consumer Prices report for the month. The reading disappointed expectations of 7.5% while against the 7.5% previous. The inflation data led to a slight weakening of the euro. The GBPUSD pair was marginally lower after inflation data released from the UK showed that the headline CPI soared to a 40-year high level of 9% in April. Apart from this, the UK-EU impasse over the Northern Ireland protocol exerted additional downward pressure on the British pound.

Bond market

U.S. Treasury yields were slightly higher as market participants weighed inflation concerns and the prospects of even tighter monetary policy. The yield on the benchmark 10-year Treasury note rose, topping a high of 3% earlier in the day. The domestic bond market traded sideways today as the overall changes recorded in the yields of the sovereign security curve remained within 5 basis points. The 10-year G-sec benchmark closed the day at 7.355%.

Equity market

Indian equity benchmarks Sensex and Nifty 50 gave up initial gains in a volatile session, amid mixed moves in other Asian markets as investors weighed optimism on easing restrictions in China with aggressive rate hikes. Losses in realty, IT, and selective financial stocks offset gains in consumer durable and pharma shares. Broader markets mirrored the moves in headline indices, with the Nifty midcap 100 and Nifty smallcap 100 indices closing the day with a cut. Investors awaited the last leg of corporate earnings for cues.

Evening sunshine

Focus to be on the US Building Permits data.

European stocks were mixed as global markets struggled to gain momentum. U.S. equity futures dropped, signaling Wall Street’s nascent recovery may falter as market participants assess hawkish comments from Federal Reserve Chair Jerome Powell. The focus will be on the US Building Permits data expected to be released later today.