ECB hinting at a positive interest rate by end of September

GBP

The pound fell to its lowest level against both the euro and US dollar after data showed a fast slowdown in business activity, adding concerns that the UK could slip into a recession later this year.

PMI data released on Tuesday showed the services and manufacturing industries declining month on month. Flash PMI fell to 51.8 from previous 57.6 in April, this was the lowest level since February 2021. The scale of the fall was bigger than any seen pre-Covid. The collapse in PMI data suggests that the squeeze on households’ disposal income is having a spillover effect on the UK economy as a whole. If data continues to disappoint, this could lead to the Bank of England putting breaks on further interest rate hikes. Money markets currently have priced in a 25 basis points rise in June, and further hikes expected later this year.

EUR

The euro gained against major currencies as European Central Bank President Christine Lagarde said she saw the ECB’s deposit rate at zero or “slightly above” by the end of September, implying an increase of at least 50 basis points from its current level could happen. Her comments gave the euro a much needed boost, and led investors to believe a rate hike is on its way to combat high inflation in the eurozone.

Investors are now speculating on whether the ECB will raise rates by 25 or 50 basis points in the coming months. The ECB’s decision to increase rates has come as a shock as the bank has not raised interest rates in a decade. Money markets are now pricing in some 63 basis points worth of hikes by the ECB’s September 14 meeting and 108 basis points rises by the end of the year.

Key announcements

09:00 – EUR – ECB President Lagarde’s speech
19:00 – USD – FOMC meeting minutes