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Europe waits for a possible record rate hike from the ECB

Image: Reuters Berita 24 English - On Thursday, stocks and bond yields moved up, but the euro fell back below parity as investors waited to ...

Image: Reuters

Berita 24 English - On Thursday, stocks and bond yields moved up, but the euro fell back below parity as investors waited to see if the European Central Bank would fight runaway inflation with a record 75 basis point interest rate hike or if it would do something smaller.

Before the ECB's decision at 12:15 GMT, traders had a lot to deal with. Oil dropped below $90 per barrel, rumours about Japanese intervention in the FX market grew, and a UK energy price plan was expected later.

The STOXX 600 index for all of Europe went up by only 0.2%, as cyclical sectors like miners, banks, and insurers, which do well when interest rates go up, gained between 1.0% and 1.1%. [.EU]

Bond and currency markets, on the other hand, showed no clear direction. After falling 15% this year, the euro fell back below $1 to $1 against the dollar, and yields on government bonds went up again after going down at first. [GVD/EUR]

Paul Hollingsworth, the Chief European Economist at BNP Paribas Markets 360, said that most markets were expecting the ECB to raise rates by 75 basis points, based on what some of its top policymakers have said recently.

"It's important that inflation in Europe isn't at its highest point yet," Hollingsworth said.

"If they do deliver the 75 bps, it's likely that more hikes will be priced in, and the euro could rally a bit, but we would try to fade that," he said, citing the coming recession and winter energy crisis.

After hitting a 20-year low of $0.9864 earlier in the week, the euro fell 0.19 percent to $0.99885.

The British pound was also in the red again, and the UK's new Prime Minister, Liz Truss, was about to announce a package of measures that would cost more than 100 billion pounds ($115 billion) to stop rising energy bills for consumers and businesses.

The extra spending has made people worry about the UK's debts, but BNP Paribas' Hollingsworth said that a cap on energy prices could at least bring the peak rate of inflation in the UK down to 10% from 15%.

The pound hit its lowest point since 1985 on Wednesday. At $1.1498, it was down 0.3% for the day and 15% for the year, just like the euro. [/GBP]


Overnight, most Asian stocks went up because oil prices dropped to levels not seen since Russia invaded Ukraine. China, however, was the only country that didn't go up because weak data showed that the COVID-affected economy was getting even worse.

Japan's Nikkei share average went up 2.3%, and for the first time this month, it went over the psychological barrier of 28,000 points. This was because the weaker yen helped Japanese exporters.

MSCI's broadest index of Asia-Pacific stocks other than Japan went up by 0.3%, and Australia's S&P/ASX 200 went up by 1.7%.

Chinese blue chips fell 0.3%, though, after trade data came out on Wednesday that was worse than expected and the lockdown in the city of Chengdu was extended, showing that the country's strict zero-COVID policy hasn't changed.

Gary Ng, a senior economist at Natixis in Hong Kong, said, "Today, the big question for Asia is whether zero-COVID will continue to affect the Chinese economy, which will have an effect on imports."

The markets were also waiting for Federal Reserve Chairman Jerome Powell's speech later in the day to see if it showed that the U.S. central bank would ease up on its efforts to fight rising inflation.

The Fedwatch tool from CME Group shows that the chances of a third consecutive 75-basis-point increase in interest rates are now about 76%. This is up from 69% a week ago.

"In the short term, the markets will probably just wait and see," said Ng. "Whether it's 50 basis points or 75 basis points is important, but the most important thing is whether inflation can reach its peak and what the Fed's plan is for raising rates in the future."

The yen was just below 144 per dollar after dropping almost as far as 145 overnight.

Deputy Chief Cabinet Secretary Seiji Kihara said on Thursday that Japan is ready to act if the yen moves quickly. He was repeating the government's verbal warnings as the currency hovered near lows not seen in 24 years.

"We worry about the currency market moving quickly and in only one direction," Kihara said at a news conference. "If such moves continue, we would like to take necessary action," he said, fanning speculation of possible FX market intervention.

At 109.73, the dollar index, which compares the value of the U.S. dollar to a group of currencies from other major trading partners, was up a little.

Oil prices went down overnight, but they went back up a little bit the next day. However, they stayed below $90 a barrel for the first time since early February because of worries about a global recession. In early European trading, U.S. crude fell 0.5% to $81.51 per barrel, while Brent crude went back up to $87.38 per barrel.

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