IFX Market Report: Tuesday 12th July 2022

The US dollar hit a new two-decade high against major currencies, buoyed by the search for a safe-haven asset and expectations of further aggressive rate hikes from the Federal Reserve. The uptrend for the dollar, coupled with an upside surprise in the release of jobs data last Friday, contributed to the dollar's latest bout of strength. This rise in the dollar was seen in most currency markets, with the euro falling to $1.0005 in the Asian session, its weakest level since December 2002.

The pound also fell reaching its lowest level in two years at 1.1846 USD. The Fed is expected to raise rates by 75 basis points for the second straight time at its meeting on 26th-27th July. Fed funds futures predict its benchmark rate will rise to 3.50% by March, from 1.58% currently.

The recent depreciation of the euro seems to have been largely driven by the market's expectations of a potential for a deeper slowdown in growth in the eurozone, governments, markets and businesses fear that Russia could extend the gas pipeline shut down due to the war in Ukraine, which would exacerbate the continent's energy supply shortage and could hasten a recession. The French government is set to pay more than 8 billion euros to bring electricity giant EDF back under full state control, with the goal of closing the deal in autumn as a consequence of the energy supply issues and poor results.

The European Central Bank has been waiting to increase interest rates when all other major central banks, even the Swiss National Bank, have already acted on inflation. The situation sees bond yields soar and fears that countries like Italy or Greece would not be able to pay back their debts is what drives this decision to wait for interest rates increase. However, Italy pays about 8.3% interest according to the World Bank, the lowest it has paid since the 1970s, a fact that drives experts to be very critical of the ECB and its anti-fragmentation tool. This morning the German ZEW Economic sentiment achieved far worse than expected at -53.8 compared to the expected -38.3 initially, figures that may drive the euro to break parity with the US dollar.

In the United Kingdom, candidacy for Tory leadership nominations end today at 18:00 BST, with candidates needing at least 20 MPs to support their nomination. Voting will go underway tomorrow and will see candidates reduced to two finalists by the end of next week, with the goal of announcing the new leader and PM on the 5th of September.

Cable saw the dollar win big with a -1.07% on the pair yesterday. GBPUSD opened at 1.2029 and closed at 1.1889.

EURUSD followed a similar trend with the rate opening at 1.0173 and closing at 1.0039 as the rate heads closer to parity or even breaking it.

GBPEUR saw the Euro back to losses again. The pair opened at 1.1810 and closed at 1.1834.

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