IFX Market Report: Thursday 21st July 2022

The Euro rebounded this morning ahead of the ECB’s interest rate decision this afternoon. The European currency benefited from a regain of trust after Russia restarted the Nord Stream 1 pipeline after 10 days of maintenance. The pipeline is currently running at 60% capacity, just as it was prior to maintenance when Russia cut off gas supplies to 6 EU members and reduced supplies to 6 more. Russia supplied 40% of Europe’s gas before the war and only supplies about 15% now, and despite the restart, fears that Europe could struggle to heat itself this winter remain.

Italy is one of the countries with the highest cost of energy, and the sector has been a big driver in the rising inflation in the country. Mario Draghi’s proposal to address the situation has led to a political crisis in the country which has seen the 5 Star Movement reject his policies and the prime minister's resignation rejected by president Mattarella last week. Yesterday, despite winning a vote of confidence in the Senate in an attempt to revive his coalition, the 5 Star Movement, Forza Italia and Lega Party all announced they wouldn’t take part, marking what is effectively the collapse of the government. The situation puts pressure on the Euro as Italy’s bond yields have been soaring and could put its economy in a very delicate position and the ECB under pressure just before its interest rate decision.

In the United Kingdom, the final face-off will oppose former Chancellor Rishi Sunak to current Foreign Secretary Liz Truss in the Tory leadership race. The two candidates have often clashed on economic policies during the campaign with Ms Truss promising a £38bn tax cut, a scrap of the National Insurance rise in April, as well cancelling the planned corporation tax raises for 2023 that Mr Sunak announced in March last year. He argues the tax rises are needed to fight inflation and the rising public budget deficit burden which has reached £23bn in June and rising debt interests of £19.4bn in June alone with Britain already borrowing £55.4bn in Q1 of this year.

The dollar rebounded slightly despite a drop in existing home sales by -5.4%. GBPUSD opened at 1.1990 and closed at 1.1969 yesterday.

GBPEUR saw small drop for the euro as the German PPI came in weaker than expected at 0.6% ahead of today’s interest decision by the ECB. The pair opened at 1.1730 and closed at 1.1756 yesterday.

EURUSD followed a similar trend yesterday with the pair opening at 1.0228 and closing at 1.0177.

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