ECB hikes 25 basis points.

The ECB increased interest rates by 25 basis points with the main refi rate at 4.00% which was in line with consensus forecasts and a 22-year high.

According to Bank President Lagarde, Indicators of underlying price pressures remain strong, although some show tentative signs of softening. She added that longer-term inflation expectations need monitoring and that recent wage deals added to upside inflation risks.

Lagarde also stated that further interest rate increases were needed with another hike in July. Subsequent source reports from the ECB suggested that a further rate hike in September was also possible.

US retail sales increased 0.3% for May after a 0.4% increase the previous month and stronger than consensus forecasts of a marginal decline. Underlying sales increased 0.1% for the month which met market expectations while the control group recorded a 0.2% increase on the month.

Initial jobless claims were unchanged at 262,000 in the latest week and above consensus forecasts of 250,000 while continuing claims increased to 1.78mn from 1.76mn.

The New York Empire manufacturing index recovered very sharply to 6.6 for June from –31.8 previously and well above consensus forecasts of –16. There was a slight employment decline for the month while there was a notable easing of price pressures on the month. Companies were more confident over the outlook, but expect pricing pressures to ease further.

The Philly Fed manufacturing index edged lower to –13.7 from –10.4 previously and close to consensus forecasts. Employment declined slightly on the month while inflation pressures were subdued.

US yields moved lower on the day with the 10-year yield retreating to around 3.72%. The Euro posted gains on the crosses after the hawkish ECB rhetoric.

Risk appetite strengthened during Thursday with further optimism that China would sanction a substantial stimulus to underpin the economy. Equities posted gains with commodity currencies also posting gains.

The Bank of Japan made no changes to monetary policy following the latest policy decision with yields remaining capped at 0.50%.

The Euro posted limited gains after the ECB policy decision. Hawkish ECB rhetoric triggered further Euro gains. The dollar lost ground as yields moved lower. Stronger risk appetite also undermined dollar demand. EUR/USD posted 1-month highs just above 1.0950 before settling just below this level.

Lower US yields protected the yen, but the Japanese currency lost ground on the crosses. Stronger risk appetite undermined the Japanese currency. USD/JPY found support close to 140.00 and rallied to 140.65 after the BoJ policy decision.

The Swiss franc held firm despite robust risk appetite. EUR/CHF settled near 0.9750, USD/CHF posted sharp losses to 0.8915.

Sterling was underpinned by firm risk appetite and high Uk yields. GBP/USD posted 13-month highs above 1.2780.

Hopes for Chinese stimulus measures supported commodity currencies. AUD/USD surged to highs near 0.6900 before settling around 0.6875. USD/CAD dipped sharply to 9-month lows at 1.3210 before consolidating around 1.3235.

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