Weekly market analysis: Euro volatile in wake of ECB rate hike, UK wavers on mixed UK data

Philip McHugh July 25th 2022 - 3 minute read

The euro traded erratically last week as the European Central Bank (ECB) shocked markets with a 50bps interest rate hike.

At the same time, a glut of mixed UK economic data stoked volatility in the pound through last week’s session.

So far this week, Sterling is mostly rangebound with GBP/EUR steady at €1.17, while GBP/USD is flat at US$1.20.

Looking ahead, will another aggressive rate hike from the Federal Reserve help to bolster the US dollar this week.

Pound seesaws on mixed data

The pound opened last week on a positive note, with Sterling sentiment being bolstered by speculation the Bank of England (BoE) could raise interest rates by 50bps at its August meeting. 

However a series of mixed macroeconomic releases then saw the pound trade erratically through the rest of the week.

This began with the UK’s latest jobs data, after May’s figures reported a record fall in real pay. Coupled with data showing domestic inflation climbed to a new 40-year high last month, this stoked cost of living concerns and dragged on GBP exchange rates.

The second half of the week then saw Sterling waver amid fresh political uncertainty as the Conservative leadership race entered the final round.

The end of the week then saw some surprisingly robust UK PMI releases help to counteract a contraction in UK retail sales and allowed the pound to tick higher against many of its peers.

Turning to this week, in the absence of any notable UK data is likely we will see GBP investors turn their focus back to UK politics, with the uncertainty of the Tory leadership race potentially infusing volatility into GBP exchange rates.

Euro rocked by ECB’s shock 50bps rate hike

The euro initially ticked higher at the start of last week, bolstered by its negative correlation with the US dollar as the latter weakened

The single currency then began to gather momentum through the first half of the week amid reports the European Central Bank (ECB)was discussing a potential 50bps rate hike at its July policy meeting.

However the euro then ran into some headwinds in the middle of the week amid fresh fears of a European gas shortage.

EUR exchange rates then saw some dramatic swings in the wake of the ECB’s interest rate decision on Thursday. The euro initially skyrocketed as the bank announced a 50bps rate hike, before quickly falling back following some cautious comments from ECB President Christine Lagarde.

The single currency then trended lower at the end of the week on the back of some lacklustre Eurozone PMI figures.

The publication of the Eurozone’s latest GDP figures could drag on the euro this week amid forecasts growth will have slowed to a crawl in the second quarter.

Meanwhile the Eurozone’s latest CPI figures could buoy EUR exchange rates as another bump in inflation is likely to keep the pressure on the ECB to continue raising interest rates.

US dollar tumbles as USD investors scale bank Fed rate hike bets

The US dollar slumped through the first half of last week as USD investors continued to rein in expectations for a 100bps interest rate hike from the Federal Reserve.

These losses were compounded by a risk-on mood which prevailed through the first half of the week.

The ‘greenback’ then began to reverse some of these losses in the middle of the week as market sentiment started to sour.

However the publication of the latest US PMI figures then saw the US dollar close the week on a sour note after July’s preliminary releases reported a sizable slump in the service sector.

Centre stage this week will be the Fed as it concludes its latest policy meeting on Wednesday. This could see the US dollar underpinned by a 75bps rate hike and some hawkish forward guidance.

Also set to influence USD exchange rates will be the latest US GDP estimate. Thursday’s figures could buoy the ‘greenback’ If growth rebounded in the second quarter as forecast.

Australian dollar bolstered by hawkish RBA

The Australian dollar trended broadly higher last week, underpinned by a hawkish Reserve Bank of Australia (RBA).

Speaking at the start of the week, RBA Governor Philip Lower confirmed that more interest rate hikes are on the way. Stating that the bank ‘expects that further increases will be required over the months ahead.’

This was then reinforced by the publication of the minutes from the RBA’s July policy meeting, as they revealed policymakers are considering another 50bps rate hike in August.

Fluctuating market sentiment then tempered demand for the Australian dollar in the second half of the week, although a pullback in the US dollar ultimately allowed the closed the ‘Aussie’ to close the week on a high.

The spotlight for AUD investors this week will undoubtedly be on the publication of Australia’s consumer price index, where another jump in inflation is likely to bolster the ‘Aussie’ if it strengthens RBA rate hike expectations.

Written by
Philip McHugh

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