Scotia on prospects for the euro, not a pretty picture at all:

• In Europe, the consequences of the Ukraine war remain a clear constraint on prospects.
• European energy security remains a key consideration for the outlook over the next few months. It is not in Russia’s best interests to cut off Europe altogether from its natural gas supplies and Europe is doing a decent job of building gas reserves ahead of winter. But supply uncertainty is real and surging energy costs are lifting inflation and curbing discretionary spending and industrial output.
• Recession risks are rising in the Eurozone and hot summer weather is adding to economic headwinds; low water levels are compromising key logistical routes on the Rhine (which transports around 30% of German energy raw materials).
• The European Central Bank raised interest rates 50 bps in July but markets expect only modest rate increases over the balance of the year and yield differentials will curb the appeal of the euro (EUR) for now. N
• egative growth surprises or energy supply disruption would risk pushing the EUR below parity versus the USD, we believe.
• The unsettled Italian political backdrop, prompting Moody’s to downgrade Italy’s sovereign outlook, figures as another, nascent risk for the EUR.

Where to for EUR/USD? Scotia forecasts:

• Prior decision
• Deposit facility rate 0.00% vs -0.25% expected
• Main refinancing rate 0.50% vs 0.25% expected
• Marginal lending facility 0.75% vs 0.25% prior
• Decision to raise by 50 bps is based on updated assessment of inflation risks
• ECB approves of Transmission Protection Instrument (TPI)
• Further normalisation of interest rates will be appropriate
• Frontloading strategy allows ECB to make a transition to a meeting-by-meeting approach
• The establishment of the TPI is necessary to support the effective transmission of monetary policy
• TPI can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy
• PEPP reinvestments remains the first line of defence to counter those risks though
• Full statement

The euro has jumped on the decision with EUR/USD moving up from 1.0195 to 1.0250 as the ECB chooses to frontload its interest rate increases. In my view, it is a bit careless as their communication through all these months have been to push for a 25 bps rate hike but it is what it is.

• Raising rates by a little bit will not stop yen weakness
• Some countries that have raised rates have even seen their currencies weaken
• A large rate hike would bring substantial damage to the Japanese economy

That pretty much reaffirms that they are not really in the mood to shift their policy thinking one bit for the time being. It’s the finger-pointing way of justifying it but hey, whatever it takes. USD/JPY now trading up by 0.3% to the highs for the day at 138.65.

• German DAX +2.7%
• Stoxx 600 +1.4%
• French CAC +1.8%
• UK FTSE 100 +1.0%
• Italy MIB +2.4%
• Spain IBEX +2.1%