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Daily Wrap Up 21 July 2022

21 Jul 2022 05:04 PM

Euro cools post ECB hike

The European Central Bank caught some by surprise as it lifted interest rates by 0.5% as the bank previously hinted about a 0.25% lift. Policymakers felt it was appropriate to go with a larger hike than previously suggested, partially because of the record high inflation in the eurozone, and partially due to the fact it has not lifted rates in 11 years while other central banks have carried out multiple rates hikes in the last few months. From the ECB’s point of view, they do not want to fall too far behind in terms of tightening policy because if the euro lags other currencies, that could lead to imported inflation. Even though the bank hiked rates they also announced their new Transition Protection Instrument (TPI), which is a tool for the central bank to purchase governments as a means of keeping a lid on yields. Some of the more indebted eurozone countries could come under pressure if their borrowing costs rise. When details about the TPI were released, that removed some of the hawkish edges to the update as the ECB are taking two steps forward and one step backwards. Shortly after the rate announcement was made, EUR/USD traded above 1.0270 but it has since dropped below 1.0200.

It has been a tough day for Italy, its Prime Minister Mario Draghi resigned, and then the ECB increased rates. Italian stocks closed in the red and the DAX saw modest losses. On a positive note, the gas pipeline between Russia and Europe resumed so that eased worries about a possible energy shortage in the continent.

There was more evidence the US economy is cooling as the jobless claims reading edged up to a six-month high of 251,000. In addition to that, the Philly Fed manufacturing report fell from -3.3 to -12.3, the lowest in over two years. This adds to the whispers the country is sliding into a recession. The S&P 500 is fractionally lower.

WTI is off over 3% because inflation and growth fears have resurfaced. In a climate of high inflation and rising interest rates, dealers are worried that demand for energies will diminish. Gold is trading back above $1,700 because the weakness in the dollar is lifting the commodity.

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