ECB opts for 75 basis-point rate hike.
The ECB increased interest rates by 75 basis points to 1.25% at the latest policy meeting, which was in line with consensus forecasts, although a minority of investment banks had expected a 50 basis-point hike. This was the largest rate hike sanction by the central bank since its inception.
The inflation forecasts were increased with staff projections that it will average 8.1% this year before a decline to 5.5% in 2023 and 2.3% in 2024.
The GDP growth forecast for 2022 was revised down to 3.1% with growth in the following two years of 0.9% and 1.9% respectively.
According to the ECB, price pressures have continued to strengthen and broaden across the economy while inflation is liable to climb further in the short term.
Fed Chair Powell stated that labour-market demand is still very, very strong and that it is important that inflation expectations remain well-anchored. He added that it is his view that we need to act forthrightly and strongly on inflation while history warns against the premature loosening of policy.
He added that he thinks policy action will be able to put growth below trend and get the labour market back in balance.
Following Powell’s comments, there was a further net shift in expectations with markets putting the chances of a 75 basis-point rate hike at this month’s meeting at just over 80%.
Japanese officials stepped-up the rate of verbal intervention on Friday with Bank of Japan Governor Kuroda stating that there had been discussions with Prime Minister Kishida.
The rhetoric triggered sharp losses for USD/JPY to lows near 142.50 and also helped trigger a wider dollar retreat.
Swiss National Bank Chair Jordan stated that the bank must ensure price stability over the medium term. He added that the Swiss franc rise tend to help rather than hurt while there was no decision yet on the September policy decision.
The German IfW Institute warned that the German economy will be in recession in 2023. Overall confidence in the Euro-Zone outlook remained fragile. Hawkish Fed rhetoric underpinned the dollar. Treasuries failed to hold gains and yields moved significantly higher
EUR/USD found support below 0.9950 and rallied to near parity. The dollar dipped on Friday after verbal intervention by Japanese officials. After sharp losses, USD/JPY found support close to 142.50.
Hawkish SNB rhetoric from Chair Jordan helped strengthen the Swiss franc. EUR/CHF dipped to lows near 0.9660 before rallying. USD/CHF retreated sharply to lows near 0.9650.
Sterling failed to gain support from the energy package. UK Markets were focussed on the death of the Queen. GBP/USD settled around 1.1500 before gains to 1.1590 on Friday with EUR/GBP rallying to near 0.9700.
There was choppy trading in commodity currencies with rallies from intra-day lows and further gains on Friday as the US dollar retreated. AUD/USD settled around 0.6750 on Friday with gains to around 0.6825 on Friday. USD/CAD dipped below 1.3100 with a further retreat to 1.3030 on Friday.