RedFX Update: EURO risk as ECB announces rates
Time for the ECB to take action?
EUR: Tomorrow sees a pivotal moment for Europe – the Central Bank is set to raise interest rates to combat inflation. The question is – 0.25% or 0.50% ?
Chief analyst at Nordea Bank commented earlier this week:
“With inflation much too high and price pressures broadening, the ECB has no room to soften its rhetoric at Thursday’s meeting – despite clearly weakening economic data.”
This assumes that we will see some aggressive views and words from the ECB, and the Pres Conference will be very closely watched for forward guidance regarding rate rises.
Some market participants think the ECB will raise by 0.50% tomorrow, which is why the EURO is stronger. EUR/USD was at €1 to $1 last week but has bounced to 1.0250 on this sentiment.
Global Economy:
After an enormous rally over the past 9months, the USD is starting to give back some gains as a global slowdown becomes more real:
Economists at CitiGroup said in a note on Wednesday, they see a 50% chance of a global recession and expect several major economies to slip into one in the next 12-18 months
Data from China last week showed 0.4% GDP growth in the second quarter of 2022. The impact of Covid is clear, and although Retail Sales rose by 3.1% in June, the growth data is below expectations and China’s own target. With this global powerhouse under-performing, the knock-on effects will be felt globally – many think the next 6 to 12 months will see a recession but are hoping for a short-lived, shallow one.
UK: This morning’s data showed annualised inflation at 9.4% vs expectations of 9.3%. In an economy considered to be excessively vulnerable to inflation, we can expect to see the Bank of England continuing to raise rates. Last night, BoE Governor Bailey told us that a 50-basis-point rise at the next meeting will be ‘among the choices discussed’, although it is ‘not locked in’.
In reaction, GBP/USD climbed to a 2-week high above 1.2000 and GBP/EUR held steady at 1.1725.
Rates :
EUR/USD 1.0250
GBP/USD 1.2050
GBP/EUR 1.1750
EUR/JPY 140.75
GBP/CAD 1.5450