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No surprises from Federal Reserve, all eyes now on the ECB

Today’s macro highlights:

  • GBP - Retail Sales (May)
  • USD - Retail Sales (May)
  • EUR - ECB rate decision

No surprises from Federal Reserve, all eyes now on the ECB

The hectic theme of fresh economic and political news continued through yesterday’s session although consequent volatility has - at least for now - remained very much focused on the short term. The ECB could change all this, but tentative confidence over the US ‘deal’ with North Korea is still encouraging risk-on behaviour, suppressing gains for the greenback.  The static UK Inflation data reading we saw released yesterday - 2.4% - did little to provide direction over how the Bank of England will act at the highly anticipated August meeting. The Federal Reserve, as was expected, added a quarter point to its interest rates, but more significant was the underlying reference that we should still expect to see a further two rate hikes in 2018.The dollar did briefly spike higher here, but gains proved short lived.

UK retail sales at 9.30am BST may provide another clue over what sort of inflation battle the Bank of England is facing. Numbers earlier in the year had been suppressed by the bad weather but will events such as the recent Royal Wedding and FA Cup final be sufficient to continue fuelling growth here - or are consumers still wary of spending too generously? Expectations are upbeat with 2.5% year on year growth being seen, in line with inflation. Anything above this would suggest consumption is genuinely on the up and would strengthen the MPC’s hand when it comes to eyeing a rate hike.

We could see some notable volatility for the Euro today as the ECB meets in what is seen very much as a ‘live’ meeting. The statement is at 12.45pm BST then we have the press conference at 1.30pm BST. With the bond buying still in play, a rate hike isn’t on the cards, but a timetable to end QE could well be presented. The market is to an extent pricing this in, with the EUR30 billion a month being wound down to zero between July and September, paving the way for a Eurozone rate hike next summer before Mario Draghi leaves office. It’s difficult to perceive a more hawkish stance than this being presented, so the risk could be on the downside for the common currency. Anything with a dovish bias could well be expected to weaken the Euro.

US retail sales should be expected to impress given the hawkish tone that was maintained by the Fed last night. The latest numbers will be released at 1.30pm BST and a headline reading of 0.4% is anticipated. Given the quick rally and reversion we saw last night in response to the FOMC statement, it does seem as if appetite for further sustainable dollar gains is proving limited right now. Again the risk could be on the downside.

Marginal gains were made during yesterday’s session, but the pair has made little overall progress since the end of last week. There’s a lot of uncertainty over the UK political situation - this week’s Brexit amendment votes seem to be storing up trouble for later - but any economic wobbles from the US could drive the pair higher.

The pair has been consolidating for the last week, but today’s messages from the ECB will be very much in focus. Anything concrete over the timing of the QE withdrawal should generate meaningful support for the pair and given the central bank’s focus of late, this is arguably where the risk lies.

The pair has been falling steadily - albeit gradually - since the start of the month. A clear message from the ECB over its policy outlook for the next quarter could feasibly be the catalyst for a more meaningful descent on the pair, back towards the lows from earlier in the year.