As if Eurozone concerns were not enough, China 'surprised' the markets and hiked interest rates this morning. The 25bp hike will come into effect tomorrow.

The impact on the markets was obvious enough: the Aussie fell  and risk appetite was dampened, while the dollar took another lurch higher.

This  move was too be expected. Inflation pressures continue to rise and the Chinese authorities have signalled their intention to quash price pressures. Thus we expect today’s move to have a limited impact on markets in the short-term.

However, in the long-term investors’ may start to worry that China is tightening rates just as growth is slowing down. Signs suggest the pace of expansion in the Asian powerhouse is slowing. Earlier this week  the June reading for Manufacturing PMI fell to 50.1, just above the 50.00 level that distinguishes expansion and contraction. The services sector survey also moderated last month compared with May.

A People's Bank of China (PBOC) spokesman said that today’s rate hike 'is not enough', however, rates should only rise gradually. Thus, we are back to data watching. Any signs that growth is slowing in China will dent risk sentiment and add to downward pressure on asset prices as investors worry that Beijing’s tightening policy is impacting growth too much.

So we can add this to the list of worries investors face this summer: Europe, US debt ceiling, slowdown in Western economies, slowdown in China aggravated by the PBOC’s rate hiking cycle.

Kathleen Brooks is research director at Forex.com

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