Italian political uncertainty weighs on EUR before ECB meeting

GBP

The pound remained stable after the release of UK inflation data on Wednesday. Inflation rose to 9.4% year-on-year beating market expectations of 9.3%. Core CPI – which strips out external drivers such as fuel – rose 5.8% year-on-year, which was in line with expectations and a touch lower than May’s 5.9%.

The data also showed price rises were widespread and not necessarily confined to energy increases only, an observation that heaps pressure on the Bank of England to stamp on rising inflation projections from workers and businesses. With inflation still at record highs, this could force the BoE to tighten monetary policy aggressively and to look towards a 50 basis points rise instead of a 25 basis points rise at the next policy rate decision. At the June’s meeting the bank stated that they will take necessary action when needed, and the inflation reading published in July is a clear indication that the bank could look to hike further.

EUR

The euro could gain on Thursday if the European Central Bank hikes interest rates for the first time in a decade. After being one of the worst performing G-10 currencies of this year, the euro could be set for a recovery depending on the rate hike delivered by the ECB and on the commentary that follows. If President Lagarde states further rate hikes and delivers a more hawkish tone, this could see EUR (currently standing at a twenty-year low against the US dollar) rally further against major currencies and recover against USD.

However, European markets still edged lower this Thursday amid Italian political uncertainty. Italian Prime Minister Mario Draghi has resigned after a week of no confidence sentiment from coalition parties.

With a rate hike expected, the markets and investors will look forward to the commentary that follows the ECB’s decision and the bank’s plan for anti-fragmentation. This tool is the ECB’s attempt to ensure the cost of servicing debt in some EU countries – most notably Italy – do not rise too rapidly. There is a concern that by raising interest rates the cost of debt paid by various Eurozone countries will start to rise. Higher debt repayments could mean some of the weaker Eurozone countries running into trouble, causing a fragmentation of the Eurozone which is ultimately a threat to the single currency itself.

The above uncertainty and apprehension being felt by markets offset the relief brought by the restart of Russian gas flows through the region’s largest pipeline Nord Stream 1.

Key announcements

13:15 – EUR – Main Refinancing Rate – Forecast 0.25% from previous 0%
13:15 – EUR – Monetary policy statement
13:30 – USD – Unemployment claims
13:45 – EUR – ECB press conference