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Preparing for lift off

View from the Trading Desk:

As inflation in the Eurozone continues to run rampant, markets are gearing up for the first European Central Bank rate hike in over a decade—an idea not being downplayed by ECB officials. Last week, Governing Council member Klaas Knot suggested that the ECB might consider a half-point rate hike in July if inflation fails to cool. However, the likely path of action would be a 25bps increase. This morning, ECB President Christine Lagarde backed other officials, commenting that the central bank’s first rate hike could come ‘weeks’ after net bond-buying ends early next quarter and that the bank should exit negative rates by the end of September. In response, we’ve seen the Euro recover more than 2.5% against the US Dollar since the May 12th low of 1.0359, while markets have ramped up expectations that Eurozone rates will rise 1% by the end of the year.

Consequently, we’ll be watching this week’s European data with a keen eye to see whether the economy can withstand policy normalization without triggering a slowdown in growth. Tomorrow’s series of Services and Manufacturing PMIs will provide an insight into economic conditions in the region, while President Lagarde is set to speak again on Tuesday and Wednesday. Meanwhile, this morning’s German ifo Business Climate data showed an unexpected rise in business confidence for May.

Bottom line: Last week, we mentioned that the Euro hasn’t particularly underperformed on a relative basis this year. It’s fair to say that we could see the US Dollar decline play out in favour of EURXXX currency pairs, providing the conditions stay favourable for the ECB to raise rates over the coming months.

The week ahead


Last week, Sterling climbed 0.83% on a trade-weighted basis following four consecutive weeks of losses. The Pound’s rebound came in conjunction with markets pricing in more aggressive monetary tightening from the Bank of England, with five rate hikes priced in for 2022, up from four last Monday. Wednesday’s Consumer Price Index release reached new 40-year highs at 9% year-on-year, as Governor Andrew Bailey made headlines with warnings of ‘apocalyptic’ consequences for society’s poorest households due to a surge in food costs. Meanwhile, the GfK Consumer Confidence survey posted its lowest ever reading at -40, signalling severe concern from UK householdsalthough, Retail Sales showed 1.4% growth in April. This week is quieter for economic data as Boris Johnson faces the publication of Sue Gray’s party-gate investigation, which is expected to contain new images that could further damage the Prime Minister’s reputation amid the cost-of-living crisis.

  • Today’s Rightmove House Price Index came in at a higher-than-expected 10.2% growth year-on-year versus expectations of 9.9%.
  • Tuesday’s Purchasing Managers’ Index data for May is forecast to show expansion in the manufacturing and services sectors, albeit at a slower pace than April’s reading.



Last week, the Euro benefitted from a weaker US Dollar as its index bounced off five-year lows, closing 0.55% higher. It opens this week above the 1.06 figure against the Greenback. Last week’s data releases for the Eurozone saw annual Gross Domestic Product hit 5.1% and the year-on-year Consumer Price Index register 7.4%slightly more favourable than expected. Although the Eurozone data calendar is light this week, European Central Bank President Christine Lagarde made headlines this morning. She remarked that the ECB is likely to exit negative interest rates by Q3, suggesting 25-basis-point rate hikes in its July and September meetings.

  • Tuesday’s Eurozone Manufacturing and Services Purchasing Managers’ Indices are predicted to come in at 54.7 and 57.4, respectively, signalling expansion in both sectors.
  • Tuesday will also see Germany's Manufacturing and Services PMIs released. Respective readings of 54.1 and 57.3 are expected.
  • Friday’s M3 Money Supply release for April is forecast to come in at 6.3%, unchanged from March.



The US Dollar ended its six-week rally on a trade-weighted basis, closing 1.37% lower as the US economy showed signs of strain under high inflation and climbing interest rates. Several analysts recently downgraded projections for economic growth, with Moody’s Analytics Chief Economist Mark Zandi putting the odds of a recession within 24 months near 50%. When commenting on US monetary policy, Federal Reserve Chair Jerome Powell has repeatedly stated that getting inflation under control is a priority and that the US may experience ‘some pain’ in the process of hiking interest rates. Last week’s data saw the Empire Manufacturing Index for May come in at -11.6 versus an expected 15.0 reading. Meanwhile, Retail Sales for April came in slightly softer than predicted at 0.9%.

  • Tuesday’s PMI release is expected to show expansion in both manufacturing and services in May at 57.8 and 55.3, respectively.
  • On Wednesday, the Fed’s meeting minutes from earlier this month will be released, providing more insight into the Fed’s decision to raise interest rates by 50 basis points.
  • Wednesday will also see Durable Goods Orders for April print. The reading is forecast to show 0.6% growth versus 1.1% growth in March.
  • On Thursday, annualised GDP QoQ for Q1 2022 is expected to read -1.3%, up from -1.4% previously.
  • Also on Thursday, the Core PCE QoQ inflation reading for Q1 2022 is predicted to be 5.2%, unchanged from the previous reading.
  • On Friday, Personal Income and Personal Spending figures for April are forecast to show growth at 0.5% and 0.7%, respectively.


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