Financial Markets Update: Mixed Data and Central Bank Actions Drive Market Sentiment

In today's financial market update, we witness mixed economic data and central bank actions shaping market sentiment. Despite the European Central Bank (ECB) cutting its growth outlook, markets find support amid better-than-expected US business activity indicators, which alleviate inflationary pressures. Furthermore, the Bank of Japan (BOJ) maintains its policy stance, adding to market stability. Let's delve into the key factors influencing today's market movements.

Key factors for today

• ECB raises rates by 25 basis points, signaling future tightening measures
• US macro data reveals slight weakening, offsetting some hawkish sentiments from the Federal Open Market Committee (FOMC)
• BOJ keeps policy unchanged, maintaining its commitment to monetary easing

Market movers

• EUR/USD advances over 1% following the ECB rate hike and confirmation of bond purchase reduction
• US June Empire survey reports better-than-expected results, with prices paid at their lowest level since mid-2020
• Philadelphia Fed Business Outlook Survey shows slight improvement
• S&P 500 jumps 1.4% to a 14-month high, while the dollar index falls 0.8%

Economic calendar

• Final EU May inflation rate
• Norges Bank conference featuring speakers from the ECB and the Federal Reserve
• University of Michigan consumer sentiment index

 The big news

The European Central Bank's decision to raise key rates by 25 basis points was in line with expectations. During the post-rate decision press conference, ECB President Christine Lagarde hinted at an upcoming rate hike, citing concerns over prolonged high inflation. The ECB also revised its inflation outlook upward for the rest of the year but lowered the GDP growth forecast. As a result, the EUR/USD pair surged over 1% towards 1.0950, eyeing resistance at the 1.1000 level.

Meanwhile, in the US, the June Empire survey outperformed expectations, demonstrating resilience in business activity. Notably, prices paid reached their lowest level since mid-2020, providing some relief from inflationary pressures. The Philadelphia Fed Business Outlook Survey also displayed a marginal improvement, further bolstering market sentiment.

The positive data helped counterbalance the perceived hawkish stance of the Federal Reserve following their recent meeting. Consequently, the benchmark S&P 500 soared 1.4% to a 14-month high, indicating optimism among investors. Simultaneously, the dollar index experienced a decline of 0.8% to 102.14, finding support just above the 101.50 mark, while resistance receded to 102.96.

In Japan, the Bank of Japan left its policy unchanged, reinforcing its commitment to maintaining monetary easing. This decision caused notable volatility in Japanese Government Bonds (JGBs), with the USD/JPY initially rising by almost 0.5% before relinquishing those gains. As traders eye resistance above the 141.00 level, the focus now shifts to 141.50. A potential pullback could expose support at 139.56.