Headlines:

• Germany July flash manufacturing PMI 49.2 vs 50.6 expected
• France July flash services PMI 52.1 vs 52.7 expected
• Eurozone July flash services PMI 50.6 vs 52.0 expected
• Euro sinks as German PMI data points to contraction in activity
• Bond yields slide as euro area PMI data sounds recession alarm bells
• 10-year German bund yields fall to seven-week lows
• ECB’s de Cos: We will see about September, we are data dependent
• ECB’s Kažimír: It is possible to expect 25 or 50 bps rate hike in September
• ECB’s Villeroy: Frontloading rate hikes does not mean terminal rate will be higher
• UK July flash services PMI 53.3 vs 53.0 expected
• UK June retail sales -0.1% vs -0.3% m/m expected

Markets:

• JPY leads, EUR lags on the day
• European equities higher; S&P 500 futures down 0.2%
• US 10-year yields down 10.7 bps to 2.801%
• Gold up 0.5% to $1,727.63
• WTI crude down 1.6% to $94.79
• Bitcoin up 1.9% to $23,558

Just a day after the ECB decided to raise rates, leading indicators in Europe started to flash recession signals with the PMI data suggesting that the Eurozone economy contracted in the month of July. Soaring prices and energy costs are to blame as demand conditions deteriorated. The worst part? Things look set to intensify in the months ahead with a gas crisis looming.

The euro tumbled on the headlines with EUR/USD falling from 1.0200 to 1.0130 before finding some footing to stick around 1.0150-60 levels, though still down 0.6% on the day currently.

The dollar caught a bid as risk sentiment also retreated slightly before some pushing and pulling is leaving the greenback more mixed now. GBP/USD also fell from 1.1985 to 1.1915 but the lows held at the 200-hour moving average once again.

Meanwhile, AUD/USD dropped from 0.6920 to 0.6895 before pulling itself up to 0.6940 at the moment, with European stocks recovering after the earlier drop on the PMI data.

However, bond yields sank hard with 10-year German bund yields dropping by nearly 19 bps to 1.03% – its lowest in seven weeks – while 10-year Treasury yields are also seen down by nearly 11 bps to 2.80% on the day.

That weighed on USD/JPY as the pair fell from 137.60 to 136.90 now as we look towards US trading.

This article was written by Justin Low at www.forexlive.com.

• 90% of gas price difference in sourcing from alternatives will be passed on to consumers
• We cannot stop the effects of higher prices from breaking through
• Uniper rescue is important because no company would not have been affected
• It is remarkable that Russia is not keeping to commitment on gas deliveries

Well, if you poke the bear, you best be ready for when it bites back. In any case, the headline remark just means more pain coming to consumers in having to already deal with rising costs on a daily basis.

This article was written by Justin Low at www.forexlive.com.

The bid in bonds is continuing to flow and that is seeing 10-year German bund yields fall to its lowest since 31 May. It is down by roughly 19 bps on the day to 1.03% in a second day of big inflows into the bond market.

Elsewhere, 10-year Treasury yields are also down by over 11 bps now to 2.794% – the lowest in over two weeks. The drop in yields today is lighting a bid in the yen now with USD/JPY falling to the lows for the day near 137.00 after having held around 137.50-60 levels at the start of European morning trade.

This article was written by Justin Low at www.forexlive.com.

The Bundesbank is out with its monthly report, noting that the economy is likely to have grown less than anticipated in Q3 and may face a new inflation spike come September as government subsidies expire. Adding that the energy crisis is marring the outlook and makes for a very distressing economic situation.

For some context, German government subsidies on fuel and rail tickets are set to expire on 31 August.

The German central bank says that „the future development of the energy market is very uncertain, especially with regard to natural gas deliveries from Russia“ and that „the risks for the price outlook are clearly pointing upwards“.

This article was written by Justin Low at www.forexlive.com.

• The data convinced me to start rate hike cycle with a bang
• Rate hike is the beginning of a series of similar steps to tame inflation
• It will take a while to get inflation to desired levels

So, now 25 bps is back in play for September? What is going on..

The minute forward guidance goes out the window, everything is just turning into a massive mess right now. And just a day after starting their rate hike cycle, we are already seeing fresh recession indicators from the PMI data today. It goes to show how the ECB has really dropped the ball on this one.

This article was written by Justin Low at www.forexlive.com.

Headlines:

• Dollar turns to gains after early stumble
• Gas deliveries reportedly to have resumed via Nord Stream 1 pipeline
• Italian prime minister Draghi: I will resign
• Italian bonds slump hard amid political upheaval
• It is shaping up to be another stinging day for oil
• BOJ’s Kuroda: Will not hesitate to ease monetary policy further if necessary
• BOJ’s Kuroda: A large rate hike would be needed to stop yen weakness

Markets:

• EUR leads, NZD lags on the day
• European equities lower; S&P 500 futures down 0.2%
• US 10-year yields up 2 bps to 3.056%
• Gold down 0.8% to $1,683.33
• WTI crude down 4.6% to $95.23
• Bitcoin down 2.6% to $22,646

It is a big morning in Europe with two out of three key risk events having played out. The Nord Stream 1 pipeline saw gas flows restart and return back to capacity prior to the maintenance period i.e. 40% or 67 million cubic metres. That provided some early relief for the euro before Italian prime minister Draghi announced his resignation, as expected.

EUR/USD climbed up from 1.0200 to 1.0230 early on before being pulled back to 1.0170-80 levels at the moment. The dollar was also initially softer before finding a footing as risk sentiment also erred slightly more negatively during the session.

USD/JPY pushed up from 138.30 to 138.70-80 levels as the BOJ stood pat and Kuroda reaffirmed that the central bank isn’t going to be shifting its policy stance any time soon.

GBP/USD hit a high of 1.2003 in the handover from Asia to Europe but settled lower as the dollar came back, falling to 1.1920 and is holding just above that now.

As equities eased lower, the aussie and kiwi also saw early advances turn the other direction with AUD/USD falling from 0.6910 to 0.6870 and NZD/USD from 0.6240 to 0.6190 – keeping at the lows for the day currently.

It is on to the ECB next as the final key risk event for the euro today.

This article was written by Justin Low at www.forexlive.com.

If you want some foreshadowing, I’ve got you covered here. As such, let’s get straight into this.

25 bps or 50 bps?

This seems to be the main thing that everyone will be watching first. As the ECB is set to deliver its first rate hike in 11 years, there are still questions surrounding how much the central bank will move. 25 bps was pretty much a given right until early this week, where there were reports suggesting that policymakers could consider moving by 50 bps instead.

The odds coming into today suggest that market pricing is pretty much a coin flip, even if economic estimates are siding with a 25 bps move. That tees up quite a dilemma for the euro and European bond yields in interpreting the immediate decision. A 25 bps move will see the euro fall alongside yields while a 50 bps move will see the opposite reaction.

That said, the latter scenario may see euro gains be short-lived as there are still plenty of economic headwinds for the currency and the region in the months ahead. A 50 bps move today will do little to change those circumstances.

Anti-fragmentation tool announcement

Too little time. That’s my view on the matter as the ECB has rushed things in order to try and appease markets but have found themselves pressured by Italy’s political upheaval at the moment. The thing I fear is that markets will leave disappointed when the ECB offers a lack of details and no strong views on the exact functionalities of the tool, and that could see bond spreads blow up – much more than they already have after Italy’s predicament earlier here.

As I type this, the spread between 10-year Italian and German bond yields has widened to 237 bps on the day.

I would expect Lagarde to exert the notion that the tool will have no limits and no conditionality. It will take the best parts of the other tools from the ECB aimed at dealing with spreads but again, can words really cover it? If it doesn’t and markets are not satisfied, the euro will have to suffer yet another gut punch before the week is over.

This article was written by Justin Low at www.forexlive.com.

Most of the rumours swirling have been around late September or early October so this one is a little bit on the earlier side. In any case, it is the only direction that we are headed for and given the recent political fracture in the government coalition, the center-right bloc (Brothers of Italy, Lega, Forza Italia) may be set for a big win.

This article was written by Justin Low at www.forexlive.com.

11 years or over 4,000 days (4,032 to be exact). That is the last time when the ECB made the decision to raise interest rates. As much as how inconsequential the actual rate hike today will be, the fact that we are seeing the central bank take up such a decision in itself is a significant one and it will be one for the history books at least.

During Draghi’s tenure as ECB president, he never got the chance to deliver tighter policy and how ironic is it that his name is in the headlines today once again – but for very different reasons. A reminder that Draghi only took over as ECB president in November 2011, after the central bank began to cut rates; less than six months after their last rate hike at the time.

In any case, the ECB is once again in the spotlight today as they are set to raise interest rates for the first time in over 4,000 days. As grand as the occasion is, I’m afraid that the gesture is the only relevance of the decision today.

It doesn’t quite matter all too much how much the ECB chooses to hike – be it 25 bps or 50 bps – because at the end of the day, it won’t convince the big picture outlook that Europe is staring down the barrel of a gun and the central bank is rather helpless to save the economy.

Inflation pressures are soaring. The Russia-Ukraine conflict continues to weigh on sentiment and squeeze energy and commodity prices. A gas crisis is looming large and the heatwave this summer hasn’t helped one bit. To call the ECB being behind the curve would be an understatement. Coming into today, they are still tied with the BOJ as being the only major central banks not to have adjusted interest rates this year.

For all the talk, it has taken so many months before we will finally see some action today. But that seems to be typical of how things are in Europe when it comes to policy decisions, no?

In any case, the immediate reaction today will be looking towards whether the ECB will hike by 25 bps or 50 bps. The euro will be swung either way as the odds are roughly a coin flip despite estimates siding with the former. But when the dust settles, I reckon it will be hard for the euro to maintain a bullish rhetoric when there is so much else going wrong for the currency from an economic perspective.

This article was written by Justin Low at www.forexlive.com.

In just two days, oil has pretty much erased its recent recovery as we see another $4 drop today to below $96 currently:

Large doses of volatility have not been foreign to oil since the Russia-Ukraine conflict but there has been a bit of a habit of heavy selling in the past few weeks. Today seems to be one of those stinging episodes for oil prices as we see a pattern of lower highs, lower lows start to develop more clearly.

The latest retreat comes after an attempted push higher, which threatened the daily trendline resistance since June (white line) but failure to breach the 8 to 11 July highs near $105 is seeing prices turn tail and run the other direction.

The drop today brings into focus key support near $95 again with the 200-day moving average (blue line) at $94.58 a major support level to watch. That alongside daily support around $93.56 helped buyers to salvage the technical picture last week and those levels will be ones to watch again as prices come under pressure.

This article was written by Justin Low at www.forexlive.com.