ECB Raised Interest Rates by 50 bps in Reaction to Rising Inflation and Russia Crisis

　　

The European Central Bank agreed to increase interest rates by 50 basis points, the first increase in almost a decade, in response to increasing inflation and the ongoing conflict with Russia. In addition, Gazprom restored gas shipments to the EU via the Nord Stream 1 pipeline, giving extra support for EUR purchasers.

In the US, the business sector’s performance has bolstered market sentiment, contributing to Thursday’s rise in US stocks, which was the greatest three-day rally since May 2022. Apple Inc. and Amazon.com Inc. moved higher ahead of the release of their quarterly earnings reports next week, while Tesla Inc. soared 10% for the day after its quarterly results above expectations. Even if recent earnings optimism and anticipation that the Fed will take a more gradual approach to tighten monetary policy functioned as tailwinds for the equity markets, investor sentiment remains fragile due to worries about increasing inflation and the possibility of a recession.

The S&P 500 and Dow Jones Industrial Average both rose on Thursday, as the US currency dropped versus its peers and investors grew more bullish about the upcoming earnings season. The S&P 500 increased by 1% daily, while the Dow Jones Industrial Average increased by 0.5%. The Consumer Discretionary and Health Care sectors performed the best among all categories, advancing 2.25% and 1.51%, respectively. Nine of eleven sectors remained in positive territory. The Nasdaq 100 surged the highest on Thursday, increasing by 1.4%, while the MSCI World index jumped by 0.8%.

Main Pairs Movement

The US dollar dropped on Thursday, maintaining its bearish trend and failing to rise above the 107.3 level as the upward advance in the equities markets and poor US economic data imposed bearish pressure on the currency. After the ECB’s monetary decision, the DXY index inched higher and reached a daily high before fresh selling began to erase all of its intraday gains. The US Weekly Initial Jobless Claims increased to 251K in the week ending July 16, exceeding the market’s expectation of 240K by a significant margin. In July, the Philadelphia Fed Manufacturing Index fell to -12.3, which weighed on the U.S. dollar.

The GBP/USD exchange rate increased by 0.16% on Thursday as the US dollar weakened across the board. However, investor sentiment deteriorated due to reasons such as the ECB’s unexpected decision to increase interest rates by 50 basis points. At the opening of the US trading session, the GBP/USD pair plummeted to a daily low below the 1.190 level before regaining upward momentum to recover its daily losses. After the release of the ECB’s monetary policy decision, EUR/USD had considerable buying pressure and reached a daily high above the 1.027 mark. The pair increased over 0.50% on the day.

The decision by the European Central Bank (ECB) to raise interest rates by 50 basis points functioned as a tailwind for gold, which climbed 1.30% on the day after reaching a daily high above $1720 in the late US trading session. The restoration of gas flows from Russia’s Nord Stream 1 pipeline exerted significant downward pressure on WTI oil prices, which fell to the $96 level during the US trading session.

Economic Data

Currency	Data	Time (GMT + 8)	Forecast
GBP	Retail Sales (MoM) (Jun)	14:00	-0.3%
EUR	German Manufacturing PMI (Jul)	15:30	50.6
GBP	Composite PMI	16:30	52.5
GBP	Manufacturing PMI	16:30	52.0
GBP	Services PMI	16:30	53.0
RUB	Interest Rate Decision (Jul)	18:30	9.00%
CAD	Core Retail Sales (MoM) (May)	20:30	1.6%

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