The European Central Bank increased interest rates as expected for the first time in 11 years yesterday. They are following in the footsteps of over 80 other central banks around the world who have already raised rates this year and leave just the Swiss National Bank and the Bank of Japan as the remaining CBs with negative interest rates. Markets had priced in around 35bps from the ECB so the decision to increase by 50bps was seen as a surprise and led to a rally in the euro. This saw EURUSD jump towards the $1.03 handle and GBPEUR fall to €1.1650.
This is the 3rd time in a quarter of a century that the European Central Bank has raised interest rates with a crisis rumbling on in the background. Both previous times saw the decisions reversed within months. 3rd time lucky?!
President Lagarde also provided information on the ECB’s new tool to control the widening of eurozone government bond spreads (Italy or Greece vs. Germany, for example). The ‘Transmission Protection Instrument’ was not well received by traders and dealers who began to question the ECB’s strategy mid-press conference. This led to a full reversal of the euro’s daily gains, nudging GBPEUR back above €1.17. The jury is still out on the ECB’s historic actions yesterday, Friday’s session will be seen as another opportunity for investors to reposition themselves. Stay tuned!
Have a great weekend.
Written by Viv Savani. 7:30am, July 22nd 2022
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