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ECB just released its monetary report; ending net asset purchases as of July 1st, raising key interest rates by 25bps next month, and expects to raise rates again in September. There are also cuts to the growth outlook, 2022's forecast was lowered to 2.8% from 3.7% and 2023's to 2.1% from 2.8%. The calibration for the September hike will depend on the medium-term inflation outlook; a larger raise (50bps)  is on the table should the inflation situation deteriorate. 

European equities dropped to the lowest in a week over fears the steps the ECB will take to reign in inflation could pressure valuations. The central bank is expected to end bond purchases this month and hike once in July and again in September, lifting the deposit rate from minus 0.5% to zero. European stocks may however be able to digest the ECB meeting positively if the central bank doesn't adopt a too hawkish tone. If global growth perspectives improve, investors could also see European stocks as an attractive opportunity, based on historical valuations. On that note, analysts see a 36% upside for European tech stocks over the next 12 months, although some of the earnings guidance may need to be revised down. One beneficiary of a hawkish ECB could be the EUR, which could reclaim some of its lost ground against the USD.

The euro has enjoyed some needed relief since 13th May after extended long positioning on the USD faded. With inflation showing no signs of weakening, money markets are expecting the ECB to raise rates incrementally all the way through to 2023, which should benefit the euro. However, analysts are not very optimistic about the regional economic outlook, rendered uncertain because of the EU energy crisis. Yesterday’s oil embargo on Russia heightened fears of further downward growth revision within the eurozone. FX traders will keep a close eye on price action around key technical levels 1.0640 (support) and 1.0780 (resistance). 

Eurozone Producer Price Index kept rising by 37.2% yoy, exceeding the previous highs. Nonetheless, the good news is that it was slower than forecasted. Today's print is the latest macro data point justifying an ECB policy normalization - stop APP and start raising rates. This morning, the Stoxx50 is recovering yesterday's losses, up 0.7%. Traders will be keeping an eye on the 3'760 support level, a move below which could send the index shooting lower.

The consumer price index calculated according to European standards (HICP) posted an increase of 8.1% over one year after 7.4% in April. Markets on average expected a figure of 7.7%. The surge in energy prices, still fueled by the war in Ukraine, reached 39.2% compared to May 2021. The inflation rate excluding energy and unprocessed food, the most-watched by the European Central Bank, reached 4.4% over one year after 3.9% last month. Following the report, stock in Europe and US futures are seeing some selling pressure. Will this be the catalyst for another selloff? Stay tuned.