Tough Day for the Euro

July 26, 2022

The dollar strengthened 0.8% overnight against the euro and also rose by 0.5% versus the kiwi and sterling as well as 0.2% relative to the Australian dollar, peso, Turkish lira, and Canadian dollar. The Swiss franc only dipped 0.1% against the dollar, and the yen held unchanged.

Today’s forex market action reflects concerns about Europe than enthusiasm about the United States. The Federal Reserve Open Market Committee begins a two-day policy review but has already signaled a likely 75-basis point hike in the federal funds target. Tomorrow’s announcement and press conference will be watched for indications of ensuing moves rather than confirmation of this month’s decision. In any case, Fed tightening throws a spotlight on the European Central Bank, where raising interest rates to contain inflation is not likely to be as straight-forward as in the United States because of the risk of internal pressure on the more indebted members using the euro, like Italy, Greece and Spain. Investors wonder if the ECB’s Transition Protection Instrument will effectively contain such a risk. While ten-year sovereign debt yields fell similarly overnight in Germany (8 basis points), France (8), Greece (9), and Spain (10), that in Italy only dropped by 3 basis points.

The Ten-year U.S. Treasury yields fell four basis points in futures.

Both the preliminary Euroland purchasing managers survey and the IFO Insititute German business climate index for this month suggest that the region may be on the brink of a recession. Even so, European Union governments have reached an agreement for a 15% across-the-board cutback in natural gas usage to ween their reliance of Russian imports. This will make the coming winter even more difficult to get through.

Net selling today in stock market action is reflected in lower U.S. futures and share price drops so far of 0.9% in the German and Italian indices as well as of 0.5% in Spain and France. Stocks closed down 0.2% in Japan and 0.9% in both India and Taiwan but up 1.7% in Hong Kong and 0.8% in China.

West Texas Intermediate oil jumped 1.9% in price, while Bitcoin’s price fell 0.9%. Gold is generally steady.

Spanish producer prices jumped 1.9% on month and posted the fifth consecutive year-on-year advance (43.2%) of at least 40% in June. By comparison, PPI inflation had been 15.4% in June 2021 and minus 6.1% in June 2020.

Swedish producer prices catapulted 2.5% on month in June and to a record largest year-on-year increase of 25.6%.

Japanese corporate service price inflation finally reached the 2.0% threshold in June in spite of a third straight monthly uptick of only 0.1%.

In central banking news today, minutes from the Bank of Japan Board’s June meeting confirm a need to keep interest rates extremely low and identify a goal of faster wage growth as crucial to escape the country’s decades-long challenge from deflationary risk.

Officials at the National Bank of Kyrgyzstan left their policy rate unchanged at 14.0%, where such has been since a 400-basis point rate hike in April.  The rate had been at 8.0% at the end of 2021 after increases last year totaling 300 basis points and an initial hike of 75 basis points from 4.25% in February 2020.

Great Britain’s distributive trades index recorded a sub-zero reading in July (-4) for a fourth straight month. The retail sector is being depressed by high inflation.

Industrial production in Singapore continues to trace an erratic pattern, plunging 10.5% on month in January, soaring 16.7% in February, diving 10.9% in March, reviving 2.1% in April and other 9.2% in May, but then sinking 8.5% in June. That drop was much larger than forecast and resulted in a 5-month year-on-year low rise of only 2.2%.

South Korean quarterly GDP growth of 0.7% last quarter beat expectations, on the other hand, and resulted in a 2.9% year-on-year growth rate after 3.0% in the first quarter.

Several U.S. data releases are scheduled today, including new home sales, the Richmond Fed manufacturing index, the FHFA and Case Shiller house price indices, and consumer confidence.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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