Draghi fails to fool the markets
UK retail sales data rebounded to beat expectations with a 0.6% gain for June following a revised 1.1% decline the previous month and year-on year growth at 2.9% from 0.9% previously. Warm weather boosted high street trade while the rate of price increases slowed considerably. Sterling moved higher after the data release, before retreating quickly as underlying doubts persisted.
Comments from UK Trade Secretary, Liam Fox, that the UK could live without an EU trade deal combined with the overall tone of Brexit negotiations suggested that little headway has been made. Sterling retreated to below 1.3000 against the Dollar on Thursday which triggered stop-loss selling, resisting further losses due to Dollar weakness rather than UK demand. Sterling fell sharply against the Euro during the afternoon as the single currency strengthened to eight-month highs near 1.1140, a 1.5% gain.
As expected, the European Central Bank left interest rates unchanged following the latest Monetary Policy Meeting. After last month’s knee jerk reaction, there were no changes to forward guidance surrounding the bond-buying programme. Contrary to expectations, Mario Draghi reiterated that bond purchases could be increased if needed. Draghi’s tone was optimistic on the growth outlook and monetary conditions with economic outlook “risks” seen as balanced. He reiterated that inflation was currently low and, although inflation would eventually rise, he did not want to be tied to any fixed date or meeting to discuss any potential “tapering” or changes to the bond-buying programme.
The statement that really grabbed attention was that there would be “discussions” during the Autumn. Although the rhetoric seemed relatively neutral, the Euro gradually regained ground during the press conference and gains accelerated during US trading hours.
The Euro pushed sharply higher to trade above 1.1620 against the Dollar at 14-month highs, with Euro buyers seizing on the lack of protest from Draghi. The Euro held a very firm tone on market open today with position adjustment likely to be an important feature during the day.
US jobless claims declined to 233,000 in the latest week from a revised 248,000 previously as the labour market remains robust. The Philly Fed manufacturing index declined to 19.7 from 27.6, a nine-month low, although the six-month outlook improved.
Data To Watch:
9:30am GBP Public Sector Net Borrowing (Jun)