And this is how it starts

Market reports
Thanim Islam
  • USD gains on stronger economy
  • ECB perceived as dovish
  • BoJ shock markets


Well, what an eventful 24 hours. We’ll start with the ECB meeting. As widely expected the ECB elected to hike interest rates by 0.25% taking the target rate to 3.75%. But much like the Fed meeting on Wednesday, the ECB expressed that any future rate hikes would be data dependent noting deteriorating economic indicators which was perceived by the market as dovish. This opens up the possibility that the ECB may elect to pause in September to see the effects of interest rates on inflation and economic growth. So, dovish interpretations and as a result the EUR index dropped by 0.90%.

Data from the US showed that the economy grew more than expected to 2.4% in the second quarter. Personal consumption came in higher at 1.6% and durable goods orders came in at 4.7%. All signs that the US economy remains resilient and may well avoid a recession later this year. The combination of a dovish ECB and stronger US data caused more demand for USD with the USD index rising by 0.90%.

GBP also finished lower with the markets taking the recent stances by the Fed and the ECB as a cue for what the Bank of England may also say next Thursday, which is to be data dependent and also hint at pausing rate hikes.

Overnight the Bank of Japan surprised markets by electing to tweak yield curve controls, its tool for controlling monetary policy. Under this tool, a central bank will typically target specific yields on government bonds at differing maturities, aiming to keep long-term interest rates at a preferred level. Under the adjustment the BoJ will aim to keep yields on 10-year government bonds around 0% and its 0.50% ceiling as a reference and not rigid limit. The BoJ will in effect buy 10-year government bonds at 1% every business day thus capping the yield at that higher level. The announcement was a shock to the market with the BoJ perceived as hawkish with JPY gaining as a result. Stocks dropped also causing further demand for USD overnight.


Market rates

* Daily move - against G10 rates at 7:30am, 28.07.23

** Indicative rates - interbank rates at 7:30am, 28.07.23

Data points


  • None today.

Our thoughts

Mixed data from France this morning with French GDP for Q2 coming in higher at 0.5% versus 0.2% in Q1 and with inflation dropping to 4.3%. Further inflation numbers will be released from Germany in the afternoon as well as the latest set of consumer and economic confidence numbers for Europe. The EUR is on the back foot at present and deterioration in these numbers will likely add to further losses for EUR.

US numbers will be in focus in the afternoon following those GDP numbers yesterday. Anything to suggest sticky inflation will add to further USD gains.
We’ll also be monitoring how equities markets perform today to gauge appetite for risk and ultimately what this means for the FX space.

Chart of the day

Are we beginning to see a shift back towards the USD? The last two weeks have been eventful with the excessive interest rate expectations from the UK and EU easing following the lower-than-expected inflation numbers from the UK as well as the dovish take from the ECB meeting. As a result of flows out of GBP and EUR, we have seen increased demand for USD on the back of data suggesting that the economy is resilient as well as a possible shift in risk appetite.

Source: Bloomberg Finance L.P.

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