ECB to stay on hold for now

The euro is largely treading water ahead of the ECB’s latest interest rate decision later today. While it seems set to leave the deposit rate unchanged at 2.25%, it is likely to keep open the prospect of a further hike (following the 25bps increase in June) given the renewed rise in oil and gas prices recently, which will maintain the pressure on inflation. Currently, the market is almost as good as pricing in a 25bps increase by September and the best part of another quarter-point hike by the end of this year. EURUSD and EURGBP are trading at around $1.1425 and £0.8540 respectively, marginally firmer than this time yesterday morning, while GBPUSD continues to hover just below the $1.34 level.

Government bond yields edged higher on the day, mainly at the short end of curves with 2-year yields increasing by 3-4bps across the main markets (US Treasuries leading the way) as central bank hike expectations firmed amid rising energy prices. European stocks reversed early losses to close with gains of around 0.5% but US stocks sold off late on to end marginally lower overall, while the futures market points to a weak opening for both today.

While oil prices continue to creep higher – Brent crude is trading just shy of $97 per barrel this morning, bringing the cumulative increase from the early July lows to $25 – there has been a notable jump in European gas prices lately. They are now at new highs since the Iran war began at the end of February, and are up almost 65% from their lows in June.

As well as the ECB rate announcement, economic data due today include the European Commission’s indicator of Euro area consumer confidence (for July), the CBI’s business optimism index (July) in the UK, and the regular weekly jobless claims release in the US