ECB hikes rates 50 basis points.

The ECB increased interest rates by 50 basis points to 0.50% at the latest policy meeting compared with expectations of a 25 basis-point rate hike. The deposit rate was also increased to 0.0%, moving the rate out of negative territory for the first time since 2014.

The ECB commented that the front-loading of hikes will allow the bank to make a transition to meeting-by-meeting rate decisions. It added that a further normalisation of rates will be appropriate at upcoming meetings.

The ECB also launched its Transmission Protection Instrument (TPI) which is aimed at countering unwarranted and disorderly market dynamics. President Lagarde stated that countries must comply with EU debt rules to access the TPI tool.

Italian political developments undermined the single currency. Italian Prime Minister Draghi announced his resignation with reports that new elections are likely to be held on September 18th as the governing coalition fractured.

The Euro spiked higher after ECB policy decision but failed to hold its best levels. There were further doubts whether the ECB would be able to tighten substantially over the medium term and there were further reservations over gas supplies amid the high degree of uncertainty surrounding supplies from Russia.

The Philadelphia Fed manufacturing survey dipped further to -12.1 for July from -3.3 previously and well below consensus forecasts of 1.0. Although shipments increased at a faster rate, there was a sharp decline in new and unfilled orders.

There was a slower net increase in employment for the month and there was a significant easing of inflation pressures with the prices paid index dipping to the lowest level since January 2021 and the prices received reading declined to 30.3 from 49.2 previously.

Companies were less optimistic over the outlook with the 6-month outlook reading at the lowest level since 1979.

US yields declined after the US data with the 10-year yield declining to just below 2.90% and the 2-year yield close to 3.10%.

The latest PMI business confidence data for the Euro area, UK and US will be released on Friday. The data will be important in assessing the global outlook and the relative performance among major economies.

UK retail sales declined 0.1% for June and slightly stronger than expectations of a 0.3% decline while core sales increased slightly on the month.

The GfK consumer confidence index held at a record low for July.

The Euro spiked higher after the ECB rate hike but failed to hold the gains as President Lagarde stated that the rate ceiling remained unchanged. There was further uncertainty over gas supplies to Germany with supplies likely to decline next week. The Euro moves were linked closely to overall risk conditions with a retreat when confidence in equities dipped. From 2-week highs above 1.0270, EUR/USD dipped to lows near 1.0150 and settled just below 1.0200 on Friday. The dollar was hampered by weaker Philly Fed data and lower yields.

The yen gained some support from an increase in the core Japanese inflation rate. USD/JPY dipped to lows around 137.00 before a rebound to 137.70.

The Swiss franc reversed losses to post net gains amid reservations over the Euro-Zone outlook EUR/CHF dipped below 0.9900 to near 0.9850 with USD/CHF just below 0.9700.

Sterling was undermined by an on-going lack of confidence in UK fundamentals. There was a limited recovery as equities rebounded, but with selling on rallies. GBP/USD briefly dipped below 1.1900 and held below 1.2000 on Friday.

Commodity currencies recovered as Wall Street moved into positive territory but dipped again on Friday. AUD/USD traded around 0.6900 on Friday from highs around 0.6925. The Canadian dollar was hampered by a dip in oil prices USD/CAD edged lower to 1.2890

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