The United States Dollar is wildly mixed against the G10 this morning after the European Central Bank hiked interest rates by 25 basis points, likely to close out this tightening cycle.
By contrast, US retail sales unexpectedly grew in August, even as markets expected a contraction. The moves from Christine Lagarde and her governing council are dominating market news this morning – the ECB has raised its inflation forecast for the next two years while simultaneously lowering its growth forecasts.
Lagarde did little to reassure markets that the Eurozone will not, in fact, enter a recession during her press conference this morning as well. Stating that the region’s “economy is likely to remain subdued” during the coming months, she didn’t go so far as to say she expects a contraction, but it’s clear traders are spooked about growth prospects. To that end, the likelihood of additional hikes from the ECB is quite slim, though borrowing costs will probably remain at this level for some time. They see inflation returning to 2.1% by the end of 2025 but anticipate higher than previously forecast inflation through this and next year. The cuts to the growth forecast for the region are the biggest driver of this downward movement and undoubtedly a stark warning signal for the rest of the world. Germany, the Eurozone’s largest economy, is already facing a contraction, and it appears Lagarde expects other nations to follow suit.
As we have discussed in the past, divergence between interest rates is a major driver of pricing for foreign currency. The ECB is the first major central bank to wrap up its tightening cycle today, so EUR is taking the biggest hits of the morning, and currencies with strong economic ties to the region are following suit. USD is not up across the board, however – currencies with stronger ties to the US and China are gaining on the news.
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Australian Dollar is one of only a few winners against the Buck this morning after data released overnight showed the economy added a very surprising 64,900 jobs in the month of August, and unemployment held steady. Australia’s economy appears to be taking the RBA’s tightening cycle in stride, bolstering the case for the central bank to hike interest rates one more time. Inflation appears to be creeping back toward the central bank’s 2% target, though rate cuts are highly unlikely to come any time soon.
Pound Sterling also fell victim to the ECB’s decision this morning, declining around 0.4% against USD after the news. Though the UK is no longer in the European Union, the trade ties between the two regions remain quite strong, and their economies often move in tandem. The Bank of England faces a similar quandary to the ECB next week, as inflation remains quite elevated and the macro picture teetering on the brink of a recession.