Treasury Market Commentary –

ECB hikes rates for the first time in over a decade

A weekly economic update from our Treasury team.

Published

22nd July 2022

Category

Macro Commentary

The European Central bank hiked interest rates for the first time in over a decade, by 0.50%, as they move away from the historic negative rate environment. However, the challenges continue to mount for the EU economy, with the weak Euro further adding to inflationary pressures and the troubling economic outlook. Gas supply issues are a real and ongoing threat, and political unrest in Italy remains a concern.

Next week it’s the Fed’s turn, and we expect a further 0.75% hike from the US central bank, though 1% remains possible, as they continue their aggressive tightening policy by front-loading large rate rises.

The Bank of England meet the following week, and an unprecedented rate increase of 0.50% now looks likely, with inflation hitting a 40-year high of 9.4% and forecast to reach 11% in October. Despite the jobs market remaining robust, with average pay rising at 6.2% the squeeze on real incomes continues. Retail sales figures this morning showed an annual drop of 5.8%.

Markets are still looking for UK rates to peak around 3% early next year.

Central banks continue to focus on inflation rather than growth and are giving themselves the ability to cut interest rates later next year if the economy does fall into recession.

On the exchanges, markets remain highly volatile and lacking any real conviction, though fundamentals continue to favour the dollar. GBP/USD is trading around the 1.2000 level, having recovered from its pre-covid lows just towards 1.1750, whilst GBP/EUR remains within the 1.1500 – 1.1850 range.

GBP/USD – 1-year chart

Week Ahead

Date

Release

Last

Expected*

27/7/22

US FOMC Rate Decision (Upper Bound)

1.75%

2.50%

*Bloomberg survey / Not available

Foreign Exchange

Currency

Last

Currency

Last

GBP/USD

1.1985

USD/JPY

137.70

GBP/EUR

1.1745

AUD/USD

0.6925

EUR/USD

1.0210

USD/CHF

0.9675

GBP/AED

4.4030

XAU/USD

1718

Equity Indices

Indices

Previous Close

YTD % Change

FTSE 100

7270

-1.54%

S&P

3998

-16.10%

EUROSTOXX

3596

-16.33

UK Benchmark Rates

Swap Mid (SONIA)

 

2-year

+2.71%

5-year

+2.41%


View Arbuthnot Latham’s Private and Commercial deposit rates.

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