Daily market analysis

ECB Raised Interest Rates by 50 bps in Reaction to Rising Inflation and Russia Crisis

July 22, 2022

The European Central Bank agreed to increase interest rates by 50 basis points, the first increase in almost a decade, in response to increasing inflation and the ongoing conflict with Russia. In addition, Gazprom restored gas shipments to the EU via the Nord Stream 1 pipeline, giving extra support for EUR purchasers.

In the US, the business sector’s performance has bolstered market sentiment, contributing to Thursday’s rise in US stocks, which was the greatest three-day rally since May 2022. Apple Inc. and Amazon.com Inc. moved higher ahead of the release of their quarterly earnings reports next week, while Tesla Inc. soared 10% for the day after its quarterly results above expectations. Even if recent earnings optimism and anticipation that the Fed will take a more gradual approach to tighten monetary policy functioned as tailwinds for the equity markets, investor sentiment remains fragile due to worries about increasing inflation and the possibility of a recession.

The S&P 500 and Dow Jones Industrial Average both rose on Thursday, as the US currency dropped versus its peers and investors grew more bullish about the upcoming earnings season. The S&P 500 increased by 1% daily, while the Dow Jones Industrial Average increased by 0.5%. The Consumer Discretionary and Health Care sectors performed the best among all categories, advancing 2.25% and 1.51%, respectively. Nine of eleven sectors remained in positive territory. The Nasdaq 100 surged the highest on Thursday, increasing by 1.4%, while the MSCI World index jumped by 0.8%.

Main Pairs Movement

The US dollar dropped on Thursday, maintaining its bearish trend and failing to rise above the 107.3 level as the upward advance in the equities markets and poor US economic data imposed bearish pressure on the currency. After the ECB’s monetary decision, the DXY index inched higher and reached a daily high before fresh selling began to erase all of its intraday gains. The US Weekly Initial Jobless Claims increased to 251K in the week ending July 16, exceeding the market’s expectation of 240K by a significant margin. In July, the Philadelphia Fed Manufacturing Index fell to -12.3, which weighed on the U.S. dollar.

The GBP/USD exchange rate increased by 0.16% on Thursday as the US dollar weakened across the board. However, investor sentiment deteriorated due to reasons such as the ECB’s unexpected decision to increase interest rates by 50 basis points. At the opening of the US trading session, the GBP/USD pair plummeted to a daily low below the 1.190 level before regaining upward momentum to recover its daily losses. After the release of the ECB’s monetary policy decision, EUR/USD had considerable buying pressure and reached a daily high above the 1.027 mark. The pair increased over 0.50% on the day.

The decision by the European Central Bank (ECB) to raise interest rates by 50 basis points functioned as a tailwind for gold, which climbed 1.30% on the day after reaching a daily high above $1720 in the late US trading session. The restoration of gas flows from Russia’s Nord Stream 1 pipeline exerted significant downward pressure on WTI oil prices, which fell to the $96 level during the US trading session.

Technical Analysis:

XAUUSD(4-Hour Chart)

At the time of writing, gold is trading above $1,710 after recovering from a new 2022 bottom of $1,680.82. Following the announcement of the ECB’s monetary policy decision, the US dollar weakens, hence strengthening gold.

Technically speaking, gold indicates at a bullish correction as it has officially breached the bearish channel and the middle line of the Bollinger Band, indicating that bulls are initiating the upward momentum. Currently, the RSI indicator leans into positive territory on the four-hour chart, indicating that buyers have re-entered the market and sellers have exited. Gold is anticipated to rise towards the immediate resistance level of $1,727.58. If, on the other hand, gold is unable to keep its momentum above the negative channel, gains will be restricted and further selling pressure will ensue.

Resistance: 1727.58, 1756.40, 1779.70

Support: 1680.99

AUDUSD (4-Hour Chart)

After breaking the downward trend line in mid-July, the AUDUSD four-hour chart flips upside down. The four-hour chart reveals that AUDUSD closes above the 20 SMA but below the longer SMA, indicating that AUDUSD has not yet fully turned bullish over the longer term. The breach of the current resistance will propel AUD to the next level at 0.6982. Failure to overcome the current resistance level would result in a short-term AUD low of 0.6824.

Resistance: 0.6911, 0.6982, 0.7053

Support: 0.6824, 0.6682

EURUSD (4-Hour Chart)

Following a larger-than-anticipated increase in interest rates by the ECB, the EURUSD gains ground.

From a technical standpoint, the four-hour picture turns positive; the EURUSD continues to climb after hitting a low in mid-July. The pair advances alongside the upward trend line and the 20 Simple Moving Average. However, bulls of the EURUSD face rejection after hitting the upper Bollinger Band band and the overbought zone of the RSI indicator; sellers of the EURUSD look to take action, leaping in significantly to keep the dominating bearish in place. At the time of writing, EURUSD is clinging to the ascending trend line; bulls will continue to gain if EURUSD can hold above the level, then proceed to the next immediate resistance level at 1.0304. Alternatively, if EURUSD goes below the trend line, it will turn bearish in the short term, inviting additional follow-through selling.

Resistance: 1.0266, 1.0363, 1.046

Support: 1.0146, 0.9952

Economic Data

CurrencyDataTime (GMT + 8)Forecast
GBPRetail Sales (MoM) (Jun)14:00-0.3%
EURGerman Manufacturing PMI (Jul)15:3050.6
GBPComposite PMI16:3052.5
GBPManufacturing PMI16:3052.0
GBPServices PMI16:3053.0
RUBInterest Rate Decision (Jul)18:309.00%
CADCore Retail Sales (MoM) (May)20:301.6%