Home Daily Commentaries ECB set to hike interest rates for first time in 11 years

ECB set to hike interest rates for first time in 11 years

Daily Currency Update

It was confirmed yesterday that it will be a runoff between Foreign Secretary, Liz Truss, and former Chancellor of the Exchequer, Rishi Sunak, to be the next leader of the Conservative party and therefore the new Prime Minister. Minister for State and Trade, Penny Mordaunt, was eliminated in the final vote of Conservative MP's with a postal ballot of Conservative Party members now set to decide who will get the top job.

From a foreign exchange perspective, sterling has been little moved by the ructions in Whitehall with traders of the pound more concerned with economic growth and inflation than politics. That said, we could see some volatility once the result is confirmed in early September, dependent on the details of the winner’s intended fiscal policy. GBP/USD remains rangebound at around 1.1940 as does GBP/EUR at around 1.1710.

Key Movers

It's set to be a momentous day in Frankfurt with the European Central Bank set to raise interest rates for the first time since 2011 as it finally joins most major central banks in taking action to fight inflation that is running at multi-decade highs.

Markets are split pretty evenly on whether a 25 basis point or a 50 basis point interest rate hike will be confirmed so we should expect some volatility on its announcement as well as the contents of the accompanying Monetary Policy Statement, both which will be unveiled at 1:15pm. Thirty minutes later ECB chief, Christine Lagarde, will hold a press conference where investors will hope to glean more on the path of future rate hikes. Like the Bank of England, the ECB is in a tricky position of having to fight inflation whilst its economy slows in the face of huge uncertainty over its supply of energy from Russia.

With regards to Russian energy supplies the Nordstream pipeline that pumps gas from Russia to Germany reopened today after annual maintenance work with it running at 40% capacity which is typical for this time of year. It should be noted though that more maintenance is due later this summer which will reduce the flow of gas and there is speculation that Vladimir Putin may look to potentially turn off the taps at some point in retaliation for the economic sanctions brought upon Russia after his decision to invade Ukraine. With this in mind it is unlikely that we will see any huge recovery in the euro, especially if we get a cold winter and Putin decides to cut supplies altogether, which could see the Eurozone fall into recession. EUR/USD has slipped back under 1.02 this morning with it currently trading at around 1.0180.

Expected Ranges

  • GBP/USD: 1.1880 - 1.2000 ▼
  • GBP/EUR: 1.1660 - 1.1800 ▼
  • GBP/AUD: 1.7275 - 1.7440 ▼
  • EUR/USD: 1.0080 - 1.0300 ▼