EUR / USD
The Euro dipped lower ahead of the ECB policy decision with a retreat to 1.0180 against the dollar as Italian political developments undermined the single currency. Italian Prime Minister Draghi announced his resignation with reports that new elections are likely to be held on September 18th as the governing coalition fractured.
Gas supplies resumed through the Nord-Stream pipeline, but there were major reservations over the outlook with both factors hurting the Euro.
The ECB increased interest rates by 50 basis points to 0.50% at the latest policy meeting compared with expectations of a 25 basis-point rate hike. The deposit rate was also increased to 0.0%, moving the rate out of negative territory for the first time since 2014. The bank commented that the front-loading of hikes will allow the bank to make a transition to meeting-by-meeting rate decisions. It added that a further normalisation of rates will be appropriate at upcoming meetings.
The ECB also launched its Transmission Protection Instrument (TPI) which is aimed at countering unwarranted and disorderly market dynamics. President Lagarde stated that countries must comply with EU debt rules to access the TPI tool, although there will also be further re-investment of bond purchases.
Lagarde stated that price pressures were spreading across more and more sectors and that Euro depreciation is also causing inflation, but indicated that potential peak rates had not moved higher. The Euro spiked higher on the ECB rate decision, but failed to hold the gains with a quick reversal from 2-week highs just above 1.0275. The Euro dipped to lows near 1.1050 as risk appetite deteriorated before recovering to the 1.0200 area as equities recovered ground.
Risk appetite was more fragile again on Friday with the Euro below the 1.0200 level and the latest PMI business data releases will be watched closely during the day.
The dollar posted sharp net gains to highs above 138.80 after Thursday’s European open as yen sentiment remained weak. US initial jobless claims increased to 251,000 in the latest week from 244,000 previously which was above consensus forecasts of 240,000 and the highest reading since January 2022.
The Philadelphia Fed manufacturing survey dipped further to -12.1 for July from -3.3 previously and well below consensus forecasts of 1.0. Although shipments increased at a faster rate, there was a sharp decline in new and unfilled orders. There was a slower net increase in employment and there was a significant easing of inflation pressures with the prices paid index dipping to the lowest level since January 2021 and the prices received reading declined to 30.3 from 49.2 previously. Companies were less optimistic over the outlook with the 6-month outlook reading at the lowest level since 1979 and the data maintained reservations over the outlook.
Treasuries did gain after the data and, although the initial impact on yields was limited, the dollar dipped sharply with lows around 137.80.
Japan’s core CPI rate increased to the highest rate since early 2016 while the PMI manufacturing index retreated to 52.2 from 52.7. Japanese Finance Minister Suzuki stated that the risks of rising inflation need to be watched and the dollar dipped to lows near 137.00 as yields also declined further before a recovery to 137.90.
Domestic UK developments were relatively limited during Thursday, although markets remained uneasy over UK fundamentals after the latest government borrowing data which recorded a sharp increase in debt-servicing costs. In this context, there were also significant reservations over economic policies if Foreign Secretary Truss wins the Conservative Party ballot to be the next Prime Minster. Truss has pledged immediate and substantial tax cuts which would tend to increase short-term debt concerns. Sterling was also hampered by a weaker tone surrounding risk appetite. Sterling dipped to lows below 1.1900 against the dollar before staging a recovery while the Euro posted net gains to 0.8520. The July GfK consumer confidence held at a record low of -41 with a marginal improvement in personal finance expectations.
Retail sales volumes declined 0.1% for June, compared with expectations of a 0.3% decline while core sales increased slightly, but with a notable annual decline. Sterling was hampered by a dip in risk conditions as it traded just above 1.1950 against the dollar.
The Euro posted immediate gains after the ECB policy decision with a peak above 0.9950 against the Swiss franc, but it was unable to hold gains and dipped below the 0.99 level. There were significant reservations surrounding the Italian political situation and doubts whether the tool to prevent fragmentation would be effective which contributed to net franc buying. The dollar posted gains to above 0.9750 before fading again.
The franc secured renewed gains on Friday amid weaker risk conditions with the Euro retreating to near 0.9685 while the dollar was held below the 0.9700 level.