Daily Market Commentary 25th July 2022

The ECB raised interest rates, by a surprise 50 basis points, for the first time in 11 years last Thursday. The ECB also announced a new monetary/fiscal anti-fragmentation tool, called the Transmission Protection Instrument (TPI), which will take maturing bonds (held by the ECB) and buy Bonds from vulnerable member countries. This instrument has been designed to reduce interest rate differentials between member States. The first case will be Italy, which has spiralling bond yields and a collapsed Government. The EUR is trading below 1.0200, but remains extremely vulnerable, while the Yen has rallied to 136.00.

The Bank of Japan left rates unchanged and negative, as the only major Central Bank not to have been forced to raise rates, to combat runaway inflation. The Japanese CPI came out on Friday, holding at 2.4%, so one of the few major economies to control inflation. European PMI data turned negative on Friday and the European continent looks set for an economic recession, triggered by the energy crises and sanctions.

The coming week will be dominated by the Federal Reserve, which is expected to raise rates by a further 75 basis points once again, while markets closely watch inflation and growth data. Commodity currencies have been beneficiaries of a softer reserve, with the AUD looking to regain 0.6900, while the NZD looks to consolidate above 0.6200.