• There’s no letting-up in the euro sell-off. Yesterday’s steep decline met with follow-through losses today, even as risk sentiment, for example on equities, turned for the better. The likes of the EuroStoxx50 are adding 2% though most indices are off intraday highs. Stocks in the US open with gains of 0.5%. In a way, the euro is even performing worse than yesterday since it’s losing against every G10 peer whereas on Tuesday the common currency still held the upper hand against Scandinavian currencies. The move originated from EUR/JPY, which fell through the 139 support zone (neckline double top formation) and shortly thereafter gave up on 137.85 (June correction low). EUR/USD is losing another 1% to trade around 1.017 and thus confirming Tuesday’s break. The pair is developing further lower in the downward trend channel with parity the first technical support zone. Same story for the Swiss franc. EUR/CHF is deepening losses to 0.989. Sterling shrugs at the political turmoil after two key ministers and a series of junior officials resigned yesterday. It didn’t even budge on reports that Tories are discussing to change the bylaws in order to have another leadership ballot. After the vote of no-confidence end June, the Tory party under the current rules cannot call for another one until next year. Instead, sterling even started to strengthen during a speech by the new minister of Finance Zahawi. In an echo to his predecessor Sunak, he said it is important to have fiscal discipline and his priority is to bear down on inflation. The latter also goes for the Bank of England. Chief economist Pill and deputy governor Cunliffe both expressed willingness to act more forcefully against inflation and said a 50 bps hike is on the table as soon as next month. Both previously expressed doubts for such a move. EUR/GBP for a third time (‘s a charm?) in less than a week dips below the upward sloping trend channel. It is currently trading in the 0.856 area. Central European currencies get whacked too, being at least as vulnerable to the energy crunch and its economic implications as the rest of Europe. The Hungarian forint extends a dramatic slide to EUR/HUF 415! The zloty touched EUR/PLN 4.80 before paring some losses to 4.78 at the time of writing.
• The hefty repositioning on bond markets continued as well. Markets price out central bank action, believing they will start prioritizing growth, especially next year. Bunds again outperform US Treasuries with yield changes ranging from -3 bps (10y) to -12.6 bps (5y). The 10y yield quickly reversed an initial bump at the open and is currently testing critical support at around 1.15% extensively. US yields lose between 1.3 and 3 bps. The 10y yield over there is just a few bps away from similarly important support at 2.72%. Tonight’s hawkish Fed meeting minutes may be interesting to dive into but we doubt they will reroute market focus from growth currently back to inflation. Oil prices fail to recover from a sudden and sharp drop yesterday. Brent (-0.7%) dips to $102/barrel.
• The Romanian central bank accelerated its tightening cycle again with a larger-than-expected 100 bps rate hike today, from 3.75% to 4.75%. They started in October last year with three 25 bps moves, followed by two 50 bps hikes in February and April and 75 bps in May. Romanian annual inflation rose faster than forecast in Q2, to 14.49% Y/Y in May. Core inflation hit 9.1% Y/Y. Q1 GDP was stronger than forecast at 6.5% annually, but high-frequency indicators point to a quasi-standstill of economic activity in Q2. The NBR closely monitors developments in the domestic and international environment and will continue to use the tools at its disposal to achieve the fundamental objective of price stability in the medium term (2.5% +-1 ppt).
• The Belgian treaty of enterprises (Verbond van Belgische Ondernemingen) published its bi-annual economic dashboard. They signal out spiraling costs as the number one problem for companies. Belgian inflation exceeds 9% implying that wage costs will rise by around 11% (5 ppts more than neighboring countries) because of the automatic wage indexation system. Economic growth is expected to grind to a halt next year because of decreasing investments and a negative contribution of net exports. An upward wage-price spiral even risks triggering a recession in 2023.