Markets continued to expect a sustained period of very low Euro interest rates.
The ECB policy statement was close to expectations, although with significant divisions within the governing council.
Markets continued to expect a sustained period of very low Euro interest rates. US Treasuries edged higher with yields slightly lower on the day despite solid risk appetite. Wall Street stocks were able to post net gains, but Asian equities overall lost ground.
The dollar overall was mixed and recovered from intra-day lows. The Euro failed to hold initial gains and EUR/USD dipped back below 1.1800. Comments from BoE Broadbent were marginally dovish, but risk conditions dominated Sterling trends with net gains for currency. Commodity currencies gained support from risk conditions, but pared intra-day gains in choppy trading.
Narrow ranges prevailed ahead of Thursday’s New York open with EUR/USD holding just below 1.1800 as the firm risk tone continued to curb US dollar demand.
The ECB made no changes to interest rates with the main refi rate held at 0.0%. There was a shift in forward guidance with rates expected to remain at current rates or lower until it sees inflation reaching 2% well ahead of the end of its projection horizon and confident that it will stabilise around 2% over the medium term. It added that this may imply a transitory period of inflation above 2.0%. The bank will also maintain a higher rate of PEPP bond purchases in the short term.
Bank President Lagarde stated that inflation was expected to remain considerably below target and that revised guidance is aimed at maintaining an accommodative stance. Inflation is expected to increase strongly in the next few months, but this is also expected to be temporary with the rate declining again by the end of next year. She added that interest rates cannot be increased if inflation is below 2.0%, reinforcing expectations of very low rates over the long term.
Lagarde admitted that any disagreements were at the margins, but subsequent reports indicated that Weidmann and Wunsch opposed the new guidance due to a lack of clarity while others wanted an inflation target of at least 2%. The overall policy stance remained dovish with the bank committed to extended support.
The Euro was initially resilient after the ECB press conference and EUR/USD posted net gains but was unable to sustain the advance above 1.1800.
Euro-zone consumer confidence dipped to -4.4 for July from -3.3 previously which hurt confidence. EUR/USD dipped lower into the European close with a retreat to near 1.1760. Narrow ranges prevailed on Friday with EUR/USD around 1.1765 as market monitored potential position adjustment later in the day.
US initial jobless claims increased sharply to 419,000 in the latest week from a revised 368,000 previously and well above consensus forecasts of 350,000. Continuing claims declined slightly to 3.24mn from 3.26mn the previous week. The data triggered some reservations surrounding labour-market trends.
US Treasuries posted gains after the data with the 10-year yield below 1.30% which limited US dollar support and USD/JPY drifted lower to near 110.00 as yen selling also faded slightly as US equity futures ticked lower. Existing home sales edged higher to an annual rate of 5.86mn for July from 5.78mn previously, but slightly below expectations and there was further evidence that supply-side issues were undermining the construction sector.
The yen secured fresh support late in Europe with USD/JPY just above 110.00 and EUR/JPY dipping to 129.50. Wall Street equities held a firm tone which underpinned the dollar. Tokyo markets remained closed for a holiday on Friday with USD/JPY around 110.25 and EUR/JPY around 129.75.
In comments on Thursday, Bank of England Deputy Governor Broadbent commented that he expected the inflation increase would be temporary. In this context, higher inflation due to an increase in goods prices would not need a monetary policy response. He did, however, note that inflation risks were higher than in the May monetary policy report and there was uncertainty surrounding labour-market trends. The comments overall suggested that Broadbent would adopt a patient stance and not back an early policy tightening. Sterling edged lower after the comments, but selling was limited.
The CBI industrial trends index edged lower to 17 for July from 19 the previously month, but marginally above consensus forecasts. The survey was broadly optimistic with orders increasing at the fastest rate since 1974. There were further strong cost pressures with the fastest rate of increase since 1980.
Sterling strengthened into the New York open amid firmer risk conditions. There was no GBP/USD move to challenge 1.3800 with a retreat to below 1.3750 and wider US gains while EUR/GBP rallied to highs at 1.1700.
UK consumer confidence posted a 17-month high for July while June retail sales increased 0.4% compared with expectations of a slight decline. GBP/USD traded just above 1.3750 with GBP/EUR near 1.1680.
|07:00||GBP Retail Sales ex-Fuel (Y/Y)(JUN)||8.20%||21.70%|
|07:00||GBP Retail Sales ex-Fuel (M/M)(JUN)||0.60%||-2.10%|
|07:00||GBP Retail Sales (M/M)(JUN)||0.40%||-1.40%|
|07:00||GBP Retail Sales (Y/Y)(JUN)||9.60%||24.60%|
|08:15||Markit Serv PMI(JUL)||59.4||57.8|
|08:15||Markit Mfg PMI(JUL)||59||59|
|08:30||EUR German PMI Composite(JUL)||57.5||60.1|
|08:30||EUR German PMI Services(JUL)||55.5||57.5|
|08:30||EUR German Manufacturing PMI (M/M)(JUL)||63||65.1|
|09:00||Euro-Zone PMI Services(JUL)||58.3|
|09:00||Euro-Zone PMI Manufacturing(JUL)||63.4|
|09:00||Euro-Zone PMI Composite(JUL)||59.5|
|14:45||USD Markit PMI Composite(JUL 01)||63.7|
|14:45||USD Markit Services PMI(JUL)||64.6|
|14:45||USD Manufacturing PMI(JUL)||62.1|