Heading for 50bps?

The dollar slides to a 2-week low on dovish Fed comments while sterling firms after better than expected retail sales figures.

Previous Day's Market Highlights

Will we see a 50bps rate cut from the Fed this month? That's the question that market participants were left grappling with on Thursday as the dollar tumbled after surprisingly dovish comments from FOMC members Williams and Clarida. New York Fed President Williams emphasised how it is better to take preemptive measures rather than waiting for disaster to unfold, in addition to flagging caution that policymakers cannot afford to take a 'wait and see' approach when policy rates remain close to zero - both remarks representing a more cautious tone than seen previously. Fed Vice Chair Clarida echoed this sentiment, reiterating the Fed's 'act as appropriate' stance while emphasising the importance of preemptive action when rates are close to zero. Such dovish comments caught the market by surprise, increasing the chances of a larger 50bps cut at the FOMC meeting on 31 July. Despite the comments later being clarified as 'academic research', futures contracts now assign a 55% chance of a 50bps cut, compared to just 34% at the beginning of the day. Such dovish comments from 2 of the most senior FOMC members just 24 hours before the pre-meeting blackout period should be taken as a serious sign of a significant policy loosening being on the horizon. Not only did this send the dollar lower, but yields also fell across the curve as market participants priced in a more aggressive policy easing path. For the dollar, the dovish comments resulted in a 0.55% fall against a basket of peers, with the greenback sliding to a 2-week low. 

Elsewhere, the pound gained ground on as a combination of better than expected retail sales figures, conciliatory comments from EU Brexit Negotiator Barnier and the Commons passing legislation aimed at preventing the suspension of Parliament to force through a no deal Brexit helped sterling find support. Data showed headline retail sales increased by 1% MoM in June, the fastest pace since February. Excluding fuel, sales increased by 0.9% MoM, also a 5-month high. The data is a positive sign for the UK economy, showing the consumer remaining relatively upbeat despite ongoing uncertainties as stronger real wage growth feeds through into an increase in consumer spending, likely to help support GDP growth in the coming quarters should the trend continue. Over the course of the day, sterling added 0.9% against a weaker dollar, while adding 0.5% against the euro. 

Meanwhile, the euro recovered from early losses sparked by reports the ECB were considering a revamp of their inflation target to close 0.45% higher against the dollar. Sources stated that policymakers were considering a 'symmetrical' inflation target - allowing periods of undershooting the inflation goal to be followed by periods of overshooting it. While this increases the chances of monetary policy stimulus being in place for a longer period of time, talking about an inflation overshoot seems a little far-fetched when Draghi & Co have struggled even to boost inflation to their current goal of 2%. Barring the pound, the day's best performers were the antipodeans, with both the Aussie and Kiwi dollars adding more than 0.7% as both continued their recent strong performance and the dollar lost ground. However, the Canadian dollar didn't follow suit, the loonie closing unchanged as oil prices fell. 

Away from FX, European equity markets declined after poorer than expected corporate results, the pan-continental Stoxx 600 closing down by 0.15%. Across the pond, the US benchmark S&P 500 pared early losses, closing with a gain of 0.35% on the prospects of a 50bps Fed rate cut. Finally, oil prices also fell, despite Iranian claims of seizing a tanker in the Gulf. Both Brent and WTI settled around 2.5% lower on the day. 

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1120 1.1209 1.1048 1.44%
GBP/USD 1.2515 1.2784 1.2381 3.15%
EUR/USD 1.1255 1.1412 1.1193 1.92%
GBP/AUD 1.7720 1.8366 1.7630 4.01%
GBP/NZD 1.8475 1.9345 1.8428 4.74%
GBP/CAD 1.6320 1.6857 1.6145 4.22%

Today's Market Highlights

The week concludes with a relatively quiet economic calendar, the main highlight being US consumer sentiment figures. Data for July from the University of Michigan, the most widely used sentiment survey, is set to show consumers remaining relatively upbeat, with the index rising modestly to 98.5. Such an uptick in sentiment would follow firmer than expected retail sales figures earlier in the week, showing the US consumer largely shrugging off trade-related uncertainty. Furthermore, upbeat consumer sentiment, along with solid wage increases, should follow through into increased consumer spending in the coming months, underpinning US GDP growth.

Consumers will also be in focus north of the US border, with May's retail sales figures set to be released from Canada. Both the headline and excluding autos measures are expected to record a 4th consecutive month-on-month gain, increasing by 0.3% and 0.4% respectively. Firm data would support the BoC's upbeat stance and keep the probability of policy loosening low. Elsewhere, remarks from a couple of Fed speakers, Bullard and Rosengren, will be closely examined after yesterday's dovish rhetoric and ahead of the FOMC's pre-meeting blackout period beginning on Saturday. Meanwhile, UK public borrowing and eurozone current account figures may be glanced over by investors, but are unlikely to result in significant market volatility. 

Looking ahead to next week, the European Central Bank's (ECB) latest policy decision will be the main event. Thursday's meeting should see interest rates kept on hold, however policymakers are likely to make a dovish revision to their forward guidance, stating that rates will be kept at their present rates, or lower, at least through the first half of 2002, teeing up a 10bps deposit rate cut in September. Ahead of the ECB's decision, July's flash PMI surveys will be closely watched, particularly for any signs of a recovery in the manufacturing sector. Meanwhile, in the UK, Boris Johnson is almost certain to be announced as the new Conservative Party leader on Tuesday, while the data calendar is otherwise barren. Finally from the US, ahead of the FOMC rate decision, markets will chew over durable goods orders data and the initial estimate of Q2 GDP.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP Public Sector Net Borrowing (Jun) 3.20bln 4.46bln
1:30pm CAD Retail Sales (MoM - May) 0.3% 0.1%
1:30pm CAD Retail Sales ex-Autos (MoM - May) 0.4% 0.1%
3:00pm USD Prelim. University of Michigan Consumer Seniment Index (Jul) 98.5 98.2