ECB Delivers Larger-Than-Forecast Hike but Softens Forward Guidance

The ECB announced its first-rate hike in over a decade yesterday. In the face of soaring inflation, the central bank opted for a larger-than-expected 50bps hike. Despite the move, however, the reaction in EUR was diluted as the bank was seen softening its forward guidance. The tone of the meeting was far less hawkish than previously with the bank now citing that future rate moves will be data-dependant. Subsequently, the market has scaled back its ECB rates pricing through year-end which has taken some of the shine out of the euro here.

Key Factors for Today

• USD action remains muted – manufacturing and services PMI readings due later
• Equities finish the week on strong footing – Nikkei the standout winner on JPY weakness
• Risk currencies leading in FX, EUR muted despite ECB hike as bank downgrades forward guidance
• Firm bullish reversal in gold following ECB
• Oil prices clinging to positive end to the week

Coming Up

• EUR Eurozone & French and German PMI readings
• GBP PMI readings
• USD PMI readings

Risk Assets Firmer Into Weekend

Risk markets are ending the week on a broadly positive tone. With the US Dollar seeing muted action across the week, and yesterday’s ECB meeting failing to deliver fireworks, equities indices remain mostly supported on Friday. The Nikkei has been the big winner this week, the index has rallied over 4% benefiting from a weaker JPY and muted USD action.

Risk Currencies Remain Top in FX

In FX, risk currencies remain the strongest performers in the G10 on Friday, with AUD leading the way. A hawkish set of RBA minutes earlier in the week has put the Aussie in the driving seat. The big supporting factor this week has been the lifeless action in USD. While the selling across the early part of the week failed to pick up momentum, we’ve yet to see a recovery. On the data front, we have a string of PMI releases out of the UK, eurozone and US which traders will be closely watching given rising recessionary concerns.

Gold & Silver Rebound

Despite the heavy selling we’ve seen again this week, both gold and silver reversed sharply yesterday. Gold prices in particular saw a solid turnaround yesterday as traders reacted to the downgraded forward guidance from the ECB. Despite opting for a larger hike, the ECB’s outlook was decidedly less hawkish, suggesting fewer rate hikes to come over the year.

Oil Prices Bid on Friday

It’s been a strange week for oil prices. We saw decent demand initially before crude futures rolled over mid-week. Oil prices are finding a bid again on Friday, with crude futures just about positive on the week. A muted report from the EIA didn’t help. Gasoline stocks rising has been taken as a worrying sign over broader demand given the strong seasonality we typically see across these summer months.