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The global inflationary risk is pushing central banks to take more aggressive measures in their tightening policies. We see an example of this at the European Central Bank (ECB). Due to the inability to prevent rising inflation on the European side, the ECB is expected to raise the key rate.

The ECB’s interest rate decision, which is the most important item on the current week’s agenda, will be announced tomorrow at 15:15 Turkish time. The bank is expected to raise interest rates for the first time in 11 years. While the market expects the European Central Bank to raise interest rates by 25 basis points; Due to the unrecoverable outlook for inflation, the probability of 50 basis points in the expectation of an interest rate hike is surprisingly higher.

ECB President Christine Lagarde has said in recent statements that a 25 basis point rate hike could be made at the July meeting; He pointed out that if necessary, he could raise interest rates above 25 basis points.

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THE EURO STRENGTHENS

As the Euro started the new week higher in anticipation of a rate hike; It rose above the 1.02 level against the dollar as the possibility of a more aggressive rate hike in yesterday’s trades grew stronger. The EuroDollar parity continues to rise in the new day.

Rising interest rates from the European Central Bank and possible hawkish messages for the future should further strengthen the Euro.

The euro tied with the dollar for the first time in 20 years on Tuesday last week. The depreciation of the euro was due to the strengthening of the American currency, the dollar, and the expectation that the ECB could act more calmly in raising interest rates. Experts expect that in a scenario where things could get worse in Europe, a drop in the EuroDollar to the level of 0.90 could occur.

INFLATION CONTINUES TO RISE

Inflation figures for the European Union (EU) and Eurozone for June were announced yesterday. According to this; Inflation in the 19-member eurozone reached 8.6% on an annual basis, beating its all-time high. In the European Union, which has 27 member countries, annual inflation increased compared to the same month of the previous year and rose to 9.6%.

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Rising food and energy staples are at the forefront of rising inflation.

NATURAL GAS CRISIS IN EUROPE

The European Union is in the midst of a gas crisis. Due to the Russian-Ukrainian war, Russia withdrew its natural gas weapon in response to European sanctions against Russia. While natural gas shipments from Russia to Europe have declined; The flow of the Russia-Europe gas pipeline was finally due to “technical problems” at 40% of its capacity. Europe is already considering how to reduce gas consumption for harsh winter conditions. Russia covered 45% of European natural gas imports; Russia also has the largest natural gas reserves in the world.

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These problems on the natural gas side and the decrease in gas flows caused a sharp increase in natural gas prices in Europe, which was one of the reasons that triggered the rise in inflation. According to the draft plan prepared by the European Commission; If Russia cuts the gas, this should be reflected in the growth of the European economy by 0.6 to 1%. In the worst case, it is estimated that this will result in a growth of 1.5%. This pressure on the European economy triggers fears of recession.

Otherwise, that is to say if Russia opens up natural gas, this situation should relieve the European economy and support the euro.

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WE EXPECT AN INTEREST INCREASE OF 25 BASIS POINTS
Gökhan Uskuay – Allbatross Portfolio Fund Manager

Eyes on the European Central Bank The fate of the euro will be decided

Ahead of the European Central Bank’s (ECB) interest rate decision meeting tomorrow, interest rate hike expectations have surprisingly risen. The increase was driven by news that members of the ECB’s Governing Council will discuss rate hikes of 25 and 50 basis points at Thursday’s meeting, the sources said. The expectation of a 50 basis point increase rose from 35% to 60% with the effect of this news. In September, a 100 basis point rate hike started to be priced in.

As an Allbatross portfolio, we expect an increase of 25 basis points in July and 50 basis points in September. When we look at the distribution of inflation in the euro zone, we see that it is half energy, the other mainly food. Eurozone inflation reflects the effects of Russia’s invasion of Ukraine. Therefore, contrary to market prices, we expect the ECB to rise 25 basis points at its meeting tomorrow. A new rise and a strong signal for September; It will not be preferred by the ECB because it will lead to an increase in bond spreads (difference buy-sell).

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Accordingly, a 25 basis point increase could bring the pair back to 1.00; A 50 basis point increase could take it to 1.03. In the meeting, a course is observed in the band 1.00-1.03.

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