ECB rate rise of 50bps fails to support EUR

Good morning

ECB raised rates 50bps yesterday to take rates away from negative for the first time since 2014. EURUDS bounced from 1.0190 to 1.0275, but soon dropped sharply back to 1.0155. It then spent some time being pushed around trading around 1.0200, before being sold off once again this morning to 1.0130 as EU PMI numbers come out lower than expected. Lagarde said the weak EUR was a factor in the decision. It raises the question of what would have happened had they only raised 25bps. ECBs anti-fragmentation tool, Transmission Protection Instrument (TPI) was introduced, although ECB says it is not needed for now. Italy/Germany bond spreads are back to 230s after having pushed higher on Draghis resignation and the collapse of the government. An election will follow on 25th Sept. ECB likely to raise rates rates 50bps in Sept and then 25bps in both Oct and Dec to get rates to 1% by year end.

At around the same time EURUSD went on its rollercoaster, USDJPY fell from highs 138s so 137.75, and that move continued overnight to reach almost 137.00, helped in part by comments from Japanese FinMin Suzuki who said they need to watch the risks of rising inflation, as Japan inflation numbers were announced showing core CPI rising again. Suzuki warned export growth was not keeping pace with yen weakness. Having hit those lows, USDJPY then bounced, trading now 137.70. EURJPY hit 142.30 post-ECB but is now trading 139.65, while GBPJPY traded above 166.00 but has now moved to 164.25.

GBP has fallen back this morning. GBPUSD was up in the high 19’s when I stared writing but is falling as I type, now 1.1930. UK retail sales numbers this morning were on the weaker side together with downward revisions for some of last months data. Total retail sales came in down 5.8% compared to one year ago. GBP weakened against EUR yesterday with EURGBP trading up to 0.8580 (GBPEUR 1.1655) post-ECB but has reversed now with EURGBP at 0.8500 (GBPEUR 1.1760).

Gold had an interesting day, trading down below $1700 to low $1680s before turning around completely, reaching $1720 overnight. We have failed around the $1720 area a few times in the past week and it seems to be struggling to break above there once again.

I have mentioned rising Covid cases for a while now, and see that US President Biden is the latest to test positive with fairly mild symptoms so far. It seems that the latest variant is more transmissible, helped by the fact that previous infections don’t seem to offer much in the way of protection, and it is thought that vaccinations have less of an impact as well. You’d hope this would mean cases are less severe, indeed for many they are but the sheer numbers of infections mean hospitalisation, and unfortunately fatalities, could well continue to rise. Autumn boosters coming for the over 50’s.

So far this morning we have seen some volatility in the markets, and I reckon this is likely to continue as we move towards the weekend. Anyone hoping for a quiet day may be disappointed, mind you with temperatures today set to only just creep into the 20s and a bit of rain forecast, its not as though we can all go outside and sunbathe anyway. Should improve a little over the weekend fortunately.

As you’ve noticed I’m running a bit late so I’ll sign off for now. Have a great day and an even better weekend….

- 09.00 EU S&P manufacturing, services PMI

- 09.30 UK S&P manufacturing, services PMI

- 13.30 CAD retail sales

- 14.45 US S&P manufacturing, services PMI

- 20.30 CFTC position data