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ECB set to follow the Fed and raise rates by 25bps

European markets underwent a disappointing session yesterday, while US markets also underperformed after the Federal Reserve raised interest rates by 25bps as expected, pushing them to their highest level in over 20 years.

At the ensuing press conference chairman Powell reiterated his comments from June, that additional rate rises will depend on incoming data.

In the statement it was restated that inflation remained elevated, and that the committee was highly attentive to the risks that prices might remain high. Powell was non-committal on whether the Fed would raise rates again in September, merely restating that if the data warranted the central bank would do so.

US yields finished the day mixed, as did US stocks with little in the way of surprises from last night’s meeting, as we look ahead to today’s ECB rate meeting.

If the Fed is close to the end of its rate hiking cycle which appears to be looking increasingly likely, despite Powell’s determination to keep markets guessing, the pressure on the ECB to be more aggressive in its own battle against inflation, is also looking as if it might recede.

We’ve already seen the euro rise sharply against the US dollar in the last few weeks, which is deflationary and will help. Furthermore, factory gate prices in German and Italy have been in freefall for months now, so while core CPI has remained sticky and close to record highs at 5.5%, it’s also important to remember that the ECB has pushed rates from 2% to 4% this year already.

We expect to see another 25bps later today, however the consensus that was so prevalent at the start of this year of more aggressive rate hikes is already starting to fray on the governing council, with Stournaras of the Bank of Greece pushing back strongly against the idea of more aggressive action.

He hasn’t been the only one however, and we’ve also started to see more vocal political opposition to further tightening from Italian Prime Minister Giorgia Meloni who has been publicly critical of the ECB when it comes to recent rate hikes.

If, as expected last nights Fed hike is the last one then it is entirely feasible that the ECB could similarly be close to the end of its own rate hiking cycle.

EUR/USD – we’ve seen a modest rebound from levels just above the 1.1000 level, having retreated from the 1.1275 area which is 61.8% retracement of the 1.2350/0.9535 down move.  A break below 1.0980 could see a move towards 1.0850. Currently have resistance at the 1.1120 area.

GBP/USD – continues to pull away from the recent lows at 1.2795/00, having broken a run of 7 daily losses. While above the 50-day SMA the uptrend from the March lows remains intact with the next resistance at the 1.3020 area.    

EUR/GBP – continues to look soft with support remaining at the recent lows at 0.8500/10. Resistance currently at the 0.8600 and the highs last week at 0.8700/10.

USD/JPY – continues to drift down away from the 142.00 area, with support at 139.70. A move below 139.50 opens up the risk of a move back towards the 200-day SMA at 137.20.


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