Fed Settle for 25bps

The dollar gains ground as markets price out a 50bps July cut, while sterling's struggles continue and markets look ahead to Thursday's ECB decision.

Previous Day's Market Highlights

Will we see a 50bps rate cut from the Fed this month? Keen readers will notice that this is the same question with which I began a recap of Thursday's action, though market participants saw the situation very differently as the week drew to a close. Bets on a 50bps rate cut were rolled back significantly on Friday, with the catalyst seemingly being a Wall Street Journal report that Fed officials favour just a 25bps rate reduction this month, in line with my base case. These reports, combined with less-dovish comments from a couple of FOMC members, saw the likelihood of a 50bps cut fall to around 22%, from roughly 60% a day earlier, while bond yields rebounded across the curve. The final two FOMC speakers before the pre-meeting blackout period were contrasting, but neither overly dovish. St Louis Fed President Bullard, the FOMC's most dovish member, reiterated his desire for a pre-emptive 25bps rate cut, while Boston Fed President Rosengren signalled his reluctance to ease policy when the economy is performing perfectly well. Meanwhile, also helping the dollar were upbeat consumer sentiment figures from the University of Michigan, showing sentiment consolidating at a healthy level, with the index reading 98.4 in July. This should translate into continued solid levels of consumer spending, underpinning growth in the quarters ahead. Over the course of the day, the dollar struck a firmer tone, adding 0.3% against a basket of peers to record a 1st daily gain in 3.
Elsewhere, the pound recorded modest losses, with market participants remaining cautious due to ongoing political uncertainties. Sterling slid 0.4% against a stronger dollar, while also losing 0.1% against the euro. Although Friday's decline was modest, the pound has now recorded 11 consecutive weekly losses against the common currency, extending the worst run on record. The euro also lost ground against the dollar despite a quiet data calendar, sliding 0.5% as the greenback strengthened. Friday's only other notable releases came from Canada, in the shape of May's retail sales figures. Data showed headline sales decreasing by 0.1%, the first decline since January, while sales excluding autos declined by 0.3%. Despite the dip in sales likely being temporary due to poor weather in May, the loonie shed 0.3% in reaction to the release. 
Away from FX, European equities ended the week with modest gains, the pan-continental Stoxx 600 index adding 0.1%. In contrast, the US benchmark S&P 500 ended the day 0.6% lower, closing out its worst week since May. Finally, oil prices ticked higher on Friday after the Iranian seizure of a British-flagged oil tanker. Global benchmark Brent settled 1% higher, with US WTI crude adding 0.6%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1145 1.1209 1.1048 1.44%
GBP/USD 1.2500 1.2784 1.2381 3.15%
EUR/USD 1.1215 1.1412 1.1193 1.92%
GBP/AUD 1.7770 1.8366 1.7630 4.01%
GBP/NZD 1.8465 1.9206 1.8422 4.08%
GBP/CAD 1.6330 1.6857 1.6145 4.22%

Today's Market Highlights

The week begins with a relatively quiet economic calendar, symbolic of the week ahead's light slate of data as markets head into the typical summer slumber. Today's primary release, though still of low-importance, will be June's Chicago Fed national activity index. The index is expected to rebound to 0.1 from last month's -0.05, though this is likely to have little impact on price action. Of more interest will be a couple of central bank speakers, including BoJ Governor Kuroda and RBA Assistant Governor Kent, with market participants looking for hints of future policy shifts from both central bankers.
Looking to the week ahead, the main event is set to be the European Central Bank's (ECB) latest policy decision, due on Thursday. No change to interest rates is expected, however the ECB are likely to make a dovish revision to their forward guidance, indicating that 'rates will remain at their present levels, or lower, at least through the first half of 2020'. Such a change would tee up a 10bps cut to the deposit rate in September, along with a possible restart of the QE programme, delivering the additional stimulus recently referenced by President Draghi. Markets have fully priced in a 10bps deposit rate cut in September, with a cumulative 20bps of cuts priced in by the end of the year. It is important to note the tail risk of the ECB cutting rates this month, should the Governing Council see little justification to wait another 6 weeks and look to 'out-dove' the current market pricing.
Elsewhere, data is relatively limited, with no major releases due from the UK. Therefore, politics will remain front and centre, with the new Conservative Party leader due to be announced on Tuesday. During the first days of the new PM's premiership markets will likely focus on plans for Brexit, in addition to Cabinet appointments. Any moves closer to a no-deal Brexit will see sterling come under pressure. Turning back to data, the 1st estimate of US 2nd quarter GDP highlights the calendar, with growth expected to slow to 1.9% on an annualised quarter-on-quarter basis. Elsewhere, July's flash eurozone PMI figures are set to show economic momentum remaining weak, with the manufacturing sector set for a 6th consecutive monthly contraction.

Today's Economic Calendar

Time Currency Release Consensus Previous
1:30pm USD Chicago Fed National Activity Index (Jun) 0.10 -0.05
1:30pm CAD Wholesale Sales (MoM - May) 0.2% 1.7%
4:00pm JPY BoJ Gov. Kuroda Speech