ECB hikes rates by 50 BP, euro advances, US dollar slides
|Summary: The Euro (EUR/USD) advanced to its highest finish this week, up 0.44% to 1.0230 (1.0178 yesterday) after the European Central Bank hiked interest rates by 50 basis points. Most economists were looking for a 25 bp rise. This was the first interest rate increase in over 10 years and took the ECB’s Main Refinancing Rate to 0.50%. In a speech following the decision, ECB President Christine Lagarde said that “inflation risk has intensified.” The resignation of Italian Prime Minister Mario Draghi affected Italian government bonds but had little impact on the EUR/USD. Elsewhere, US July Philadelphia Manufacturing PMI slumped to -12.3 from June’s -3.3 and lower than median expectations of 0. The lower read showed that the US economy may be slowing. In Washington DC, the US Whitehouse announced that US President Joe Biden has tested positive for COVID-19 but is “experiencing mild symptoms.” Biden is fully vaccinated and is twice boosted and will continue carrying out his duties.
This saw the benchmark US 10-year bond yield tumble 16 basis points to 2.87% (3.03%). Other bond yields were mixed. Germany’s 10-year Bund yield eased to 1.21% from 1.25%. The UK 10-year Treasury yield dropped 10 basis points to 2.04%. Australia’s 10-year bond rate rose 2 basis points to 3.56%. Japanese 10-year JGB rates dipped to 0.22% from 0.23% yesterday.
The Dollar Index (USD/DXY), a favoured gauge of the Greenback’s value against a basket of six major currencies, fell 0.45% to 106.60 (107.05). Against the yield sensitive Japanese Yen, the US Dollar (USD/JPY) slumped 0.78% to 137.37 from 138.45 yesterday. Sterling (GBP/USD) edged up 0.20% to 1.1995 from 1.1968. The Aussie Dollar (AUD/USD) jumped 0.72% against the generally softer US Dollar to 0.6933 from 0.6885. Meantime the Kiwi, (NZD/USD) also known as the “Flightless Bird” found its wings, rallying 0.46% to 0.6250 (0.6225). Against the Asian and Emerging Market Currencies, the US Dollar settled modestly lower. USD/THB (US Dollar-Thai Baht) slipped to 36.70 (36.75), while USD/SGD (Dollar-Singapore Dollar eased to 1.3895 from 1.3930 yesterday. The USD/CNH pair (Dollar-Offshore Chinese Yuan) dipped to 6.7685 from 6.7750.
Global stocks gained. The DOW was last at 32,002 (31, 845) while the S&P 500 closed at 3,987 against 3,955 yesterday. Japan’s Nikkei rose 0.31% to 27,865 (27,618). Other economic data released yesterday saw Japan’s June Merchandise Trade Deficit improve to -JPY 1, 384 billion from -JPY 2.386 billion. Australia’s National Australia Bank Q2 Business Confidence Index fell to 5 from 15, missing forecasts at 16. The Bank of Japan kept its Policy Rate unchanged at -0.10%. Canada’s New Housing Price Index (NHPI) m/m fell to 0.2% from a previous 0.5%, lower than forecasts of 0.6%. The US Conference Board Leading Index fell to -0.8% from a downward revised -0.6% (from -0.4%0, lower than median estimates at -0.6%. UK GFK Consumer Confidence improved to -41 against expectations of -42. Just a while ago, Japan’s National Core CPI printed at 2.2%, matching median estimates.
EUR/USD – After an initial drop to 1.0152 overnight low as traders positioned ahead of the ECB rate decision, the surprise 50 basis point hike boosted the Euro to 1.0277 in volatile trade. The shared currency then eased back to 1.0227 in late New York. The ECB introduced the TPI (Transmission Protection Instrument) which basically supports the smaller southern European countries who face more headwinds that their northern neighbours from high borrowing costs.
AUD/USD – Short-covering boosted the Aussie Battler higher against the Greenback and other Rivals in choppy trade. Overnight the AUD/USD pair jumped to a high at 0.6936 from yesterday’s 0.6885 before easing to settle at 0.6933 in late New York. On Wednesday, RBA Governor Phillip Lowe said that he expects further rate increases in the months ahead.
USD/JPY – The Greenback tumbled against the Yen to finish at 137.37 (138.45 yesterday). The slide in US treasury bond yields weighed on the USD/JPY pair. Overnight low traded was at 137.29 while the high recorded was at 138.88. Move were sharp amidst volatile conditions.
GBP/USD – Sterling benefitted from the overall weaker US Dollar and bond yields. The British Pound (GBP/USD) closed at 1.1995 against yesterday’s 1.1968. Overnight high traded was at 1.2004 while the low recorded was at 1.1889. The main support for the GBP/USD pair was short-covering heading into today.
On the Lookout: Today’s economic calendar picks up as global Manufacturing and Services PMIs are scheduled for release. Australia kicked off with its Flash Manufacturing PMI which fell to 55.7 from a previously upward adjusted 56.2 (from 55.8). Australian Flash Services PMI fell to 50.4 from a previous 526. Japan follows with its Flash Manufacturing PMI (f/c 53.1 from 52.7). The UK starts off European reports with its June Retail Sales (m/m f/c -0.3% from -0.5%; y/y f/c -5.3% from -4.7%), UK June Core Retail Sales ex-Fuel (m//m f/c -0.4% from previous -0.7%; Y/y f/c -6.3% from -5.7). Germany follows with its Preliminary July Manufacturing PMI (f/c 50.6 from 52.0), German July Services PMI (f/c 51.2 from 52.4). France releases its July Manufacturing PMI (f/c 50.8 from 51.4), French July Services PMI (f/c 52.7 from 53.9). The Eurozone follows with its July Manufacturing PMI (f/c 51 from 52.1), Eurozone July Services PMI (f/c 52 from 53). The UK is next with its July Manufacturing PMI (f/c 52 from 52.8), UK July Services PMI (f/c 53 from 54.3). Canada kicks off North America with its May Headline Retail Sales (f/c 1.6% from 0.9%), Canadian May Core – ex Autos Retail Sales (f/c 1.6% from 1.3%). Finally, the US releases its S&P July Global Manufacturing PMI (f/c 52 from 52.7), US July S&P Global Services PMI (f/c 52.6 from 52.7).
Trading Perspective: Welcome to Friday! Heading into the weekend, the US Dollar saw further position unwinding which boosted most of its Rivals. Global central banks like the ECB have narrowed the gap between themselves and the US Federal Reserve. The 50-basis point rate increase by the European Central Bank lifted the EUR/USD pair to finish0.44% higher against the Greenback. Which effectively prevented the shared currency from trading at Parity. For now. Today we can expect more consolidation as we approach the weekend. Overall expect the US Dollar to be supported at current levels against the other FX. Most global Manufacturing and Services PMIs are expected to ease modestly. Any big divergences would spur further FX volatility. It’s Friday today, we’re almost there. So, keep those tin helmets on, and get ready for more rumble.
EUR/USD – The Euro’s rebound rally against the Greenback faces stiff resistance at 1.0280-1.0310. The shared currency closed at 1.0230 from 1.0178 yesterday. The 50-basis point rate increase from the ECB, while it’s the first in over a decade, only lifted the EUR/USD pair 0.44%. We can expect further selling interest on Euro rallies. Immediate resistance today lies at 1.0250, 1.0280 and 1.0310. Immediate support can be found at 1.0200, 1.0170 and 1.0140. Likely range today – 1.0170-1.0320. Looking to sell rallies to 1.0300.
(Source: Finlogix.com)
AUD/USD – The Aussie Battler survived further selling pressure to finish 0.72% higher at 0.6933. Immediate resistance on the AUD/USD pair lies at 0.6940 (overnight high 0.6936). The next resistance level is found at 0.6970 and then 0.7000. Immediate support is found at 0.6900, 0.6870 and 0.6840. Look for consolidation between 0.6850 and 0.6950. Sell rallies.
USD/JPY – Against the Yen, the US Dollar slumped to 137.37 (138.45 yesterday) weighed by lower US bond yields, which narrowed rate differentials. For today, look for immediate support at 137.00 followed by 136.70. Immediate resistance can be found at 137.70, 138.10 and 138.50. Look for another choppy session in this currency pair, likely range today 137.30-138.70. Preference is to buy dips, 140 USD/JPY appears achievable.
GBP/USD – Sterling edged up against the US Dollar to 1.1995 from 1.1968 yesterday. Overnight the British currency traded to a high at 1.2004 before easing to its New York close. Immediate resistance today lies at the psychological 1.2000 level. The next resistance level is found at 1.2030 and 1.2060. Immediate support can be found at 1.1960, 1.1930 and 1.1900. Overnight low traded was at 1.1889. Look for further choppy trade in Sterling, likely range 1.1920-1.2020. Keep an eye on UK data releases today. The preference remains to sell GBP/USD rallies.
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