IFX Market Report: Friday 22nd July 2022

The European Central Bank increased its interest rates by 50 basis points yesterday as it tries to fight inflation which reached 8.6% in June. The rate hike was sharper than expected with markets expecting a 25 basis points increase with bond yields soaring in debt-laden countries like Italy. The political situation in the country also weakens the euro, as Mario Draghi resigned once again yesterday as the prime minister of Italy and the last time a populist came to power in 2018, this prompted a major sell-off of Italian bonds.

In an attempt to address the issue, the European Central Bank on Thursday presented a new program of bond purchases from eurozone member states that have seen their borrowing costs skyrocket through no fault of their own, on the condition that those beneficiary nations resume sound economic policy. As part of this tool, the Transmission Protection Instrument (TPI), the ECB will buy "public sector securities, whose remaining maturity is between one and ten years" and even plans to buy private sector securities if necessary. The tool has so far failed to convince, there is a lack of detail as to how and when the tool will be deployed and the ECB’s willingness to use it. However, the aim is to use this tool to counter bond yield hikes in some countries in order to be able to increase interest rates as necessary to fight inflation.

Despite gains yesterday with the ECBs announcement, the euro is already marking a -0.84% loss this morning on EURUSD, as disastrous results in PMI in France, Germany, and the wider eurozone see all manufacturing industries in contraction with all manufacturing PMIs ranging from 49.2 to 49.6 and services PMI ranging from 49.2 to 52.1 in France. All sectors performed significantly worse than expected, showing that inflation already drives European industries to face a demand crisis.

The situation in the United Kingdom is on the other hand very different as Britain boasts good PMIs performance with PMI ranging from 52.2 in manufacturing to 53.3 in services. Both remain in expansion and outperformed expectations despite higher inflation in the United Kingdom (9.4% in June) than in the European Union. Core retail sales also saw a jump by 0.4% when a decrease of -0.4% was expected, and with retail sales slowing down at a slower pace than expected at -0.1% compared to the -0.3% anticipated, the Kingdom continues on its good momentum over recent weeks compared to its European and American counterparts.

Cable continues its sinusoidal curve as it jumped once again by 0.20% yesterday. GBPUSD opened at 1.1967 and closed at 1.993 yesterday.

GBPEUR the ECB’s announcements strengthen the euro. The pair opened at 1.1761 and closed at 1.1721 yesterday.

EURUSD followed a similar trend yesterday with the pair opening at 1.0178 and closing at 1.0228

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