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Euro gets boost after ECB supersizes rate hike

The euro advanced against the dollar after Russia resumed gas supplies to Europe and the European Central Bank surprised markets with a 0.5 percentage-point rate hike.

The advance by the single currency came on a mixed day for European stocks but a good session on Wall Street, where equities advanced for a third straight day.

While ECB policymakers had signaled they would hike rates at the meeting on Thursday to tame soaring inflation, analysts were divided about whether the traditionally cautious institution would proceed with a quarter-point or half-point move.

City Index analyst Fawad Razaqzada said the euro’s recent slump – it briefly fell under dollar parity last week – meant that the eurozone is now importing more inflation, which favoured a bigger hike.

The jump in eurozone inflation to an annual rate of 8.6% in June also increased pressure on the ECB, as did the fact other central banks have moved more aggressively than markets had expected.

“The ECB had to surprise, otherwise the euro would have plunged – and they couldn’t risk that,” Razaqzada said.

The ECB also introduced a new tool to counter spikes in the borrowing costs of some eurozone countries.

With the resignation of Prime Minister Mario Draghi increasing the political risk in Italy and sending Italian government bond yields climbing, the ECB may need to use its new tool.

The difference between Italian government bond yields and Germany’s, the eurozone benchmark, widened on Thursday.

The political crisis sent Milan’s FTSE MIB index down 3%, though it later pared those losses to close with a 0.7% decline.

Paris stocks managed a 0.3% gain, while Frankfurt’s DAX slid 0.3% despite the resumption of Russian gas flows.

Russia on Thursday restored critical gas supplies to Europe through Germany via the Nord Stream pipeline after 10 days of maintenance.

European officials had worried that Moscow would find a pretext to keep the gas shut off.

Uncertainty still lingers over whether the Kremlin might trigger an energy crisis on the continent this winter.

ECB President Christine Lagarde acknowledged that the fallout from Russia’s war in Ukraine and soaring inflation have darkened the eurozone’s economic outlook.

Article Source: Euro gets boost after ECB supersizes rate hike – RTE

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