European Central Bank to increase interest rates by 50 bps

EUR

The euro rallied to fresh highs against both the US dollar and Sterling on Thursday as the European Central Bank delivered its first rate hike in eleven years. However EUR fell in the afternoon as concerns regarding the Eurozone’s economy weighed on the currency.

Having started the day firmer on Thursday, the euro rallied by 0.8% against the dollar and the pound as the ECB announced it would lift interest rates by 50 basis points from negative territory to 0% in a bid to combat rising inflation in the Eurozone. This was deemed an hawkish hike by investors as many had forecasted the ECB to raise rates by only 25 basis points following guidance issued by the bank earlier in the month. Commenting after the decision, ECB President Christine Lagarde stated a deterioration in the inflation outlook meant a larger than expected increase was necessary. Lagarde added that further hikes may be appropriate and decisions will be made meeting by meeting.

In addition to raising the interest rate, the ECB announced it had developed a mechanism called Transmission Protection Instrument which could be enforced to prevent any excessive borrowing costs for governments across the bloc as monetary policy tightens. Whilst the mechanism is seen as a positive for debt laden members like Italy, the euro also fell because of the ECB failing to provide concrete details as to when and how it would be used.

GBP

This morning, data released by the Office for National Statistics showed mixed results for British Retail Sales as inflationary pressures seemingly forced consumers to tighten their purse strings last month. According to the data released by the ONS, Retail Sales (YoY) (June) contracted by 5.8% which was larger than the forecast of a 5.3% contraction. Whilst the year-on-year figure fell below expectations, the month-on-month figure was above expectations to show a contraction of 0.1% against projections of a 0.3% contraction. ONS Deputy Director Heather Bovill issued a warning that the broader trend for retail sales is a decline, adding that food was the only sector to report an increase due to the Jubilee celebrations. Separate data published by research company Gfk showed that UK consumer confidence remained at -41 in July, its lowest since records began in 1972.

Key announcements

06:00 – GBP – Retail Sales (MoM) (Jun) achieved -0.1%
06:00 – GBP – Retail Sales (YoY) (Jun) achieved -5.8%
07:30 – EUR – S&P Global/BME Composite PMI (Jul) actual 48
07:30 – EUR – S&P Global/BME Manufacturing PMI (Jul) actual 49.2
09:00 – EUR – S&P Global Composite PMI (Jul) consensus 51