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QE ends before Mario goes

QE ends before Mario goes

Retail sales increased 1.3% in May, beating forecasts of a 0.5% gain. An upward revision to April’s data pushed the year-on-year increase sharply higher to 3.9% from 1.4%. Core retail sales also increased by 1.3% to give a 4.4% annual gain. The chances of an August rate hike remained around 40% on the Futures markets. Sterling initially pushed higher, although momentum faded quickly as international events then dominated.

The Euro fell to lows near 1.1461 after the European Central Bank (ECB) decision and the Pound fell sharply against a firm Dollar due in part to adverse yield spreads. The government published its EU Withdrawal Bill amendment which was designed to prevent a Tory mutiny. However, by the afternoon it was stated that the amendment had been rejected by key lawmakers and Sterling fell below the 1.3300 mark against the Dollar, briefly reaching below 1.3250.


Yesterday’s main event saw Mario Draghi announce the end of Quantitative Easing. In September the monthly amount will drop to €15bn for the fourth quarter of 2018 and end in December, although developments will be dependent on favourable economic data.

As expected, the ECB made no changes to its interest rates and Draghi indicated that interest rates will be held until at least summer next year. The dovish comments on interest rates offset the bond-purchasing impact and, after a brief spike, the Euro declined sharply from highs near 1.1850 against the Dollar.

The 2018 GDP growth forecast was cut to 2.1% from 2.4%, although there were no changes to 2019 and 2020 projections. Inflation forecasts were upgraded, in part due to oil prices, with the rate expected to be 1.7% throughout the next three years.

The Euro also suffered from reports that the Bavarian CSU will end its alliance with Merkel’s CDU party and potentially trigger a government collapse and early German elections. Overall, the Euro declined to lows near 1.1550 against the Dollar, the sharpest daily decline for close to two years.


US retail sales beat expectations with an increase of 0.8% in May while underlying sales increased by 0.9% following an upwardly-revised 0.4% gain previously. Initial jobless claims declined to 218,000 and continuing claims declined to a 44-year low. US confidence rose on growth expectations and there was also a steeper-than-expected increase in import prices.

Trade concerns were an important element amid expectations that China would retaliate against a revised list of US tariffs on Chinese goods, but the Dollar still made net headway.

Data to watch:

05:00 JPY BoJ Interest Rate Decision
n/a JPY BoJ Monetary Policy Statement
n/a JPY BoJ Press Conference
10:00 EUR Labour cost (Q1)
10:00 EUR Consumer Price Index (MoM) (May)
10:00 EUR Consumer Price Index – Core (YoY) (May)
10:00 EUR Consumer Price Index (YoY) (May)
10:00 EUR Consumer Price Index – Core (MoM) (May)
10:45 EUR ECB Cœuré Speech
14:15 USD Industrial Production (MoM) (May)
14:15 USD Capacity Utilization (May)
15:00 USD Michigan Consumer Sentiment Index (Jun)
18:00 USD Baker Hughes US Oil Rig Count

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