It’s ECB day: 25 or 50 bps? – Daily Market Brief, July 21, 2022

All eyes are on the ECB as investors wait to see whether the central bank will hike rates by 25 or 50 basis points? EURUSD resumes its uptrend, as does the DAX.

·      Gas flow along Nord Stream 1 is switched back on lifting stocks in Europe

·      Italy’s FTSE MIB is a notable under performer as PM Draghi is expected to resign

·      Tesla rises pre-market after beating earnings estimates

EUR/USD is resuming the uptrend as attention turns to the ECB monetary policy decision, the most eagerly anticipated macro even this week. The announcement is due at 13:15 BST and will be followed by a press conference at 13:45 BST.

Heading towards the announcement, there is a feeling in the market that the ECB is arriving late to the rate hiking party and, as a result, may need to act more aggressively to bring inflation under control. At the June meeting, the ECB pre-committed to a 25 basis point rate hike in the July meeting. However, the picture has changed substantially since then, with inflation rising to a fresh record high of 8.6% and the broad weakening of the euro helping to import more inflation. As a result, a 50 basis point rate hike from the ECB can’t be discounted.

Following a speech from ECB President Christine Lagarde earlier this week, where she hinted at a more aggressive approach to monetary policy, expectations of an outsized rate hike rose, boosting the euro. The money markets are now pricing in around a 70% probability of a 50 basis point rate hike in July; EUR/USD has risen over 200  points above parity reached last week.

However, this by no means is to say that the ECB will hike by 50 bps. In fact, most analysts surveyed by Bloomberg predict a 25 bps hike today, which leaves plenty of room for disappointment, which could bring EUR/USD crashing back towards parity.

Gas returns

Indices in Europe are broadly rising, in a relief rally, as gas flows resumed in Nord Stream 1, the largest gas pipeline between Russia and Germany. Gas was switched back online after a 10-day outage, easing fears that the maintenance period will be extended.

Fears that Russia would use gas as a political weapon and accelerate Germany’s fall into recession had kept investors on edge across the past two weeks, weighing on the DAX and EUR alike.

Italy

The Italian FTSE MIB is a notable underperformer today, set to open 2% lower on the expectation that Prime Minister Draghi will resign today. While Draghi won a vote of no confidence, the vote was boycotted by three parties of the coalition. His resignation will likely mean political instability and a snap election in the eurozone’s third-largest economy.

Tesla

Tesla trades higher pre-market after reporting Q2 results after the close. The EV maker surprised the market with strong profits, reporting EPS of $2.27 on revenue of $16.93 billion against expectations of $1.81 on revenue of $17.1 billion. In the earnings call, CEO Elon Musk acknowledged the supply chain challenges but said that he sees commodity prices heading lower and indicated that Tesla could achieve record volume over the year. The share price extends its rebound from the 2022 low of $620 and is expected to open above $750 when trading starts later today.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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