The hot topic in Europe right now is the rise in fragmentation risks and how the ECB is letting that slide – at least for now – with the central bank likely to struggle to find a solution as it prepares to raise rates for the first time in over a decade in July.

Italian bond yields have jumped since the ECB policy decision yesterday and the selloff is hitting local stocks – banks in particular – rather hard again today. A look at the FTSE MIB daily chart:

The drag isn’t just being confined to Italy as other European indices are also tumbling again today. Here’s a glance of how the others are performing:

• Eurostoxx -1.4%
• Germany DAX -1.5%
• France CAC 40 -1.5%
• UK FTSE -1.3%
• Spain IBEX -2.0%

The euro is barely hanging on in there with EUR/USD down 0.2% to 1.0595 at the moment as the technicals are looking a bit shaky.

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

There isn’t all too much conviction in markets for the time being but there are some decent moves in European morning trade.

The dollar is keeping more mixed with the euro and pound coming under pressure against the greenback, with the former not getting much help from the ECB yesterday. There is plenty of market chatter about fragmentation risks and it isn’t going to go away any time soon.

That has also dragged down European stocks despite US futures looking more tepid. European indices are down by over 1% across the board with Italy’s FTSE MIB leading the drop, down by over 2.7% as the BTP-Bunds spread climb.

EUR/USD is now dragged to session lows, pushing towards 1.0590 as sellers look to solidify a drop below the recent consolidation range:

The pound is also down 0.3% to 1.2450 and is testing daily support around 1.2458-71 with the week’s low at 1.2430 also a key support level to watch out for. Meanwhile, USD/JPY has recouped its drop from earlier in a push back up to 133.90 levels:

Elsewhere, the dollar is trading higher against the loonie after the jump yesterday with USD/CAD up another 0.3% to 1.2735 on the day. The greenback is trading down against the aussie and kiwi though with the former moving up to 0.7115, up 0.3% against the dollar currently.

US futures are looking more tepid and tentative, so I’m not going to read much into the aussie and kiwi moves for now. It’s all about how markets will digest the US inflation data later but I fear that yesterday’s jitters will not be easily forgotten before the weekend.

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

Looks like someone isn’t concerned about the jump in the BTP-Bunds yields spread. If ECB policymakers are the slightest bit concerned, well they’re not really showing much sense of urgency for the time being. Either way, it may grow into a bigger problem in the months ahead.

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

The euro is seeing a bit of a whipsaw amid the ECB policy decision but it is one that mirrors the movement in European bond yields. As the ECB lays out an expected 25 bps rate hike in July, they are leaving the option for a potential 50 bps move in September and that is getting markets riled up a fair bit.

10-year German bund yields have jumped up to 1.42%:

Money markets have now increased bets on ECB rate hikes by year-end, pricing in 140 bps worth of rate hikes as compared to 130 bps coming into the decision today. A full on 75 bps worth of rate hikes have now been priced in by September.

Despite that, the euro’s upside may well be very limited if this is about as good as it gets in terms of hawkish surprises from the ECB today. I don’t see how else Lagarde can spin things into being more hawkish especially considering the market pricing above.

And with EUR/USD unable to look towards 1.0800 or the topside of its recent consolidation range, I fear that we could run into selling pressures as long as other dollar factors stay the course on the week:

Don’t forget that the ECB also raised its inflation forecasts and lowered its growth forecasts in its latest projections today. Stagflation much?

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

The strongest to weakest of the major currencies

The JPY is the strongest and the AUD is the weakest as the North American traders enter for the day. The JPY’s rise is in contrast to yesterday when it was the runaway weakest reaching the lowest level since February 2002 and getting within shouting distance of the 2002 high at 135.16. The high price yesterday reached 134.557.

The ECB kept rates unchanged as expected. The asset purchases program will end at the end of the month and that will usher into an expected rate hike of 25 basis points next month and going forward. They now see end of year inflation at 6.8% and 2023 at 3.5% well above the 2% target.  The market is continuing to price in a 135 basis points of increases by the end of the year.  Market traders will be focused on the press conference to begin at 8:30 AM ET and how Lagarde maneuvers through ultralow rates, high inflation, and economic slowdown as result of the Ukraine war (and high energy prices). Also at 8:30 AM, the weekly initial jobless claims will be released with expectations of 205K vs. 200K.

US stocks are higher in premarket trading, after yesterdays declines. The price of crude oil is trading marginally lower but near recent highs and above $120. Natural gas is in flux after a fire at a LNG export terminal in Texas which will likely take out supply for potentially months to Europe. Natural gas futures in the UK and continental Europe, a beneficiary of this plant’s supply, soared over 30% from Wednesday’s close. Meanwhile in the US, prices of natural gas move lower as the suspension in the exports will have the impact of keeping gas in the North American market. Natural gas futures in the US are trading at $8.24 after reaching a high yesterday of $9.65.

A snapshot of the markets are showing:

• Spot gold is trading down $3.84 -0.21% $1848.35
• Spot silver is trading down $0.10 or -0.43% $21.93
• WTI crude oil is trading down $0.20 and $21.90
• bitcoin is trading at $30,361 after trading at $30,248 near the 5 PM New York traders exit yesterday

In the premarket for US stocks, the futures markets are implying a higher opening

• Dow is trading up 125 points after yesterday’s -269.24 point decline
• S&P index is up 19 points after yesterday’s -44.89 point decline
• NASDAQ index is up 69 points after yesterdays -88.96 point decline

In Europe, the major indices are lower as higher energy prices way on the stock markets

• German DAX is down -85 points or -0.59% at 14361
• France’s CAC down -15.7 points or -0.24% 6432
• UK’s FTSE 100 is down -37.5 points or -0.49% up 7555.21
• Spain’s Ibex is down down 44 points or -0.50% at 8798.21
• Italy’s FTSE MIB down down 113 points or -0.46% at 24131

In the US debt market, the yields are modestly changed with the longer end a little lower ahead of the 30 year bond auction at 1 PM ET

US yields are little changed/mixed

In the European debt market, benchmark 10 year yields are mixed as traders adjust to the ECB decision.

Benchmark 10 year yields in Europe

This article was written by Greg Michalowski at www.forexlive.com.

• Prior decision

• Deposit facility rate -0.50%
• Main refinancing rate 0.00%
• Marginal lending facility 0.25%

• APP purchases to end on 1 July
• Intends to raise key interest rates by 25 bps at July meeting
• Looking further ahead, ECB expects to raise rates again in September
• Inflation pressures have broadened, intensified
• Will maintain optionality, data dependence, gradualism and flexibility
• Inflation seen at 6.8% in 2022, 3.5% in 2023, 2.1% in 2024
• GDP growth seen at 2.8% in 2022, 2.1% in 2023, 2.1% in 2024
• Full statement

The euro got a bit of a whipsaw with a push to 1.0748 before falling back down to 1.0688 and is now keeping around 1.0700 against the dollar. The key passage is that the ECB „intends“ to hike rates by 25 bps in July but they are leaving the option for a potential 50 bps rate hike in September though. On the latter, the statement reads:

„Looking further ahead, the Governing Council expects to raise the key ECB interest rates again in September. The calibration of this rate increase will depend on the updated medium-term inflation outlook. If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.“

That will come down to inflation data in the months ahead but for now, the euro is being knocked around a little as the hawkish bets (even if it were to be little to begin with) coming into the meeting are put off – for July at least.

Besides that, the ECB raises its inflation forecasts and cuts its growth forecasts – which is very much expected. Lagarde will come next at 1230 GMT.

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

Headlines:

• USD/JPY pauses for breath on the day
• Euro remains steady ahead of ECB meeting decision
• ECB meeting today to be a placeholder for July?
• Beijing’s Chaoyang district to close all entertainment venues for pandemic containment

Markets:

• JPY leads, AUD lags on the day
• European equities lower; S&P 500 futures up 0.5%
• US 10-year yields down 1 bps to 3.019%
• Gold down 0.3% to $1,846.93
• WTI crude flat at $119.76
• Bitcoin up 0.6% to $30,350

It was a quiet session as all eyes are fixed on the ECB policy meeting decision at 1145 GMT.

Major currencies didn’t show much appetite outside of the yen, which recouped back some of its staggering losses over the past week. USD/JPY fell from 134.00 to 133.20 and even with such a move, it barely feels like anything more than an ant bite to the unrelenting rally in the past two weeks.

The euro continues to keep steadier with EUR/USD little changed around 1.0720, awaiting Lagarde & co. later.

Bond yields are also little changed after a slight push higher at the start of the session, as traders are likely waiting on the ECB for clues on how to proceed before the end of the week. Meanwhile, European indices remain sluggish but US futures are pointing to a modest advance in a bit of a mixed showing in the equities space.

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

From a technical perspective, there’s not much in it in terms of EUR/USD price action at the moment. The pair looks to be caught in a bit of a consolidation phase in anticipation of the ECB meeting this week – after having seen the dollar retracement bounce stall at the 38.2 Fib retracement level at 1.0787.

Since then, there hasn’t been much direction as we also see more of a push and pull mood in the bond market and equities alike. But the ECB could be a catalyst for a move in the euro at least today, one way or another.

I mentioned here that the bar for any hawkish surprise is rather high and that will be a tough condition for the euro to bank on in order to rally. Lagarde needs to deliver clear hints of a potential 50 bps rate move in July for that to happen and I reckon we could see EUR/USD pop through 1.0800, all things being equal.

That said, with markets already pricing in ~130 bps worth of rate hikes through to year-end by the ECB, one can argue that any upside may be more limited especially if economic conditions worsen in the months ahead.

But barring any hawkish surprise, the euro might be set up for disappointment today. A drop back towards testing the lower bound of the consolidation range at 1.0627-42 will be a big test and if that gives way, we could be revisiting 1.0500 next.

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

Prior -2.3%Market index 288.4 vs 308.3 priorPurchase index 208.2 vs 224.1 priorRefinancing index 709.5 vs 751.6 prior30-year mortgage rate 5.40% vs 5.33% priorThe awful readings continue with the market index tumbling to a fresh 22-year low, suggesting that the housing market is cooling amid the rise in rates. The question now is how will all this feed into house prices, which have yet to significantly come off the boil. And if it does, what exactly does that say about the state of the US economy in general?

The euro is showing some bit part resilience on the day as it regains some ground after following other major currencies lower against the dollar earlier. It is now the best performer on the day with a focus on the ECB tomorrow. The technical picture shows a bit more of a consolidation in EUR/USD price action in the past two weeks:

Despite the dollar being firmer today, the euro is the exception as markets continue to aggressively price in ECB rate hikes. As things stand, money markets have priced in odds of 75 bps worth of rate hikes by September as compared to the 70 bps on Friday. Meanwhile, odds of a 50 bps rate hike in July is pretty much a coin flip.A lot will depend on the ECB language tomorrow to determine how aggressive or justified the market pricing currently is.I’m on the camp that markets have gone a little too far in pricing ECB hawkishness, especially considering the economic headwinds.It’s a tough one for policymakers when they are getting so little help from lawmakers in the inflation battle but rate hikes aren’t the solution. We’ve known that for a while already and so does Lagarde & co. surely.Anyway, the euro is pretty much waiting in line for a fresh catalyst to break on either side against the dollar. The ECB might offer some clues tomorrow, so keep your eyes and ears peeled for that.