News & Analysis


Volatility in the pound was largely driven by developments in mainland Europe yesterday, with GBPUSD only notching gains on the day due to a mild dollar sell-off at the end of the session. Against the single currency, the pound continued to lose ground. As expected, commentary by BoE Chief Economist Huw Pill yesterday failed to generate any market relevant headlines, while UK specific developments focused on analyst expectations of the market reaction to a Liz Truss victory. This morning, focus shifts back to the British consumer and the impact the cost-of-living crisis is having on spending in services. Data this morning saw consumer confidence remain near record lows and retail sales volumes contract a further 0.1% MoM in June. Although the headline retail sales figure saw growth, this is largely due to the inflation increasing the value of sales. At 09:30 BST, markets will digest the preliminary PMIs for July.


All of the market focus rested on developments in Europe yesterday, and rightly so. News of renewed gas flows through the Nord Stream 1 pipeline offset concerns about Italian political risk for currency traders, leaving the euro up to 0.5% higher in the morning ahead of the ECB decision. At 13:15 BST, the new time for the central bank’s policy announcement, the ECB lifted all of its interest rate tools by 50 basis points, effectively exiting negative interest rates after 8 years. Although our base case, the decision surprised markets, who had only priced a roughly 40% probability of this event ahead of time. The euro rallied near to a percentage point, while money markets priced in a more hawkish near-term rate profile in euro-area swaps. However, despite the immediate bullish reaction, the euro’s rally began to fade as President Lagarde took to the stage. Despite her best efforts to avoid outlining the conditions of the new anti-fragmentation tool prior to the formal release at 2:45pm BST, a constant flow of questions from journalists forced her hand. What initially looked like tighter conditionalities than previously expected saw peripheral bond spreads widen, peaking just shy of 250bp on the 10-year Italian BTP – German Bund spread, leading to the euro retracing earlier gains. At the end of the meeting, the single currency traded roughly flat on the day. We think the main outcome for the euro from yesterday’s meeting is a reinforcement of support above the parity threshold, not only from rates but the rare references to the currency’s performance and it’s impact on inflation from President Lagarde. For now, this should see euro trade on a better footing above last week’s lows, but downside risks still present themselves in Italian political ongoings and any sudden shift in gas flows from Russia. Today, markets will be paying close attention to the Q3 Survey of Professional Forecasters, released at 09:00 BST, which the ECB had priority access to yesterday and likely based their decision on to hike by a larger increment as they stated they aimed to strengthen inflation expectations at target. Any signs of potential de-anchoring should see money markets price increased expectations of upcoming meetings. Additionally, growth conditions will be in scope for euro traders as the latest batch of preliminary PMIs at are released between 08:15 and 09:00 BST.


The broad dollar generally took a back seat in yesterday’s session for G10 traders, that was until it generally sold off towards the New York equity close, lifting risk assets in response. This morning, the dollar is back front and centre for G10 traders as recession fears reignite and feed into a stronger greenback. Today’s swathe of preliminary PMIs from Europe and the US will either entrench these concerns or negate them, as expectations sit just above the breakeven 50 level for most composite measures. With the Federal Reserve meeting the stand out event for markets next week, dollar buying may also take place heading into the weekend.


The Canadian dollar remained sensitive to broad dollar gyrations in yesterday’s session as little was pencilled into the data calendar. Despite still elevated levels of volatility, the daily change in the USDCAD pair upon close was minimal. Today, with recession fears returning for markets, the loonie may see a slight reversal in this week’s gains heading into the weekend. Much will rest on the US PMI for July at 14:45 BST and May’s retail sales print at 13:30 BST.



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