ECB Dovish on Interest Rates

By Simon Eastman

Thursday was dominated by the ECB interest rate decision due at lunchtime. There had been reports the Europeans were talking about a rate hike in the coming months, with most expectations for a July hike. Most reports were for a 50 basis point hike in July, with another 50 points hike in September.

We actually saw a 25 point hike and indications the bank were less likely to implement multiple 50 basis point hikes. A larger move in September could still be on the cards but it’s not a done deal, with inflation and other key economic data still under consideration.

A less aggressive cycle of hikes, contrary to what we have seen from the Federal Reserve, leant to a weaker euro over the afternoon trading session, with sterling gaining nearly a cent and a half at its peak, although clearly over cooked as it retreated back half a cent as the markets came to a close. It was announced the asset purchase program will come to an end for the EU in July and there will be a 25 point hike in interest rates. Markets now expect a possible 50 point hike in September and another 25 point hike in December with potential for further 25 point hikes into 2023 as inflationary pressures ease.

Interesting to note, even with a weaker euro, still sterling remains under its own pressures, with Boris Johnson seemingly not out of the woods yet, despite winning the no confidence vote this week. He faces increasing pressure to act on the cost of living crisis, as forecourt fuel prices continue to rise with little sign of stopping, with £2 a litre expected in the coming months, adding further woes to an already struggling households.

So, with the PM under pressure, will sterling feel the heat too as we round off the week? We have no UK or EU data of note, awaiting US inflation at lunchtime. Canadian unemployment data also comes at 1.30pm so any Loonie buyers make sure to keep in touch.  Contact the currency team for some friendly guidance to discuss any upcoming transfer requirements and the options available.