Will Mario Spring a Surprise?

Sterling firms as PM Johnson appoints his first Cabinet, while all eyes will be on the ECB today - will there be a dovish surprise?

Previous Day's Market Highlights

There was a relatively rare phenomenon on Wednesday - a rally in the pound, with sterling then managing to hold onto its gains. The pound added around 0.35% against the dollar and 0.5% against the euro, hitting a 1-month high against the latter, though there was little in the way of an obvious catalyst for the move. Sterling's overall strength seemed to stem from a weaker euro after a disappointing set of PMI figures (more below), with the effects of such a move spilling over into other sterling crosses. The rally came despite ongoing political developments, with Boris Johnson formally being appointed Prime Minister, making his 1st speech and announcing his new Cabinet team. Boris gave little in the way of fresh information in his speech, reiterating that he plans to "come out of the EU on 31st October, no ifs or buts", in addition to believing that a new deal with the EU is possible. Turning to the Cabinet, after a mass clear-out of ministers who backed Jeremy Hunt, Boris's appointments consisted largely of long-term allies as well as those close to the Vote Leave campaign in the 2016 EU Referendum. Some of the key appointments include Sajid Javid as Chancellor, Priti Patel as Home Secretary and Dominic Raab as Foreign Secretary and de facto Deputy PM. By surrounding himself with the Vote Leave referendum team, Boris is seemingly sticking to his 'do or die' Halloween Brexit mantra, heightening the chances of an early general election should Parliament manage to block a no deal Brexit.
Elsewhere, as mentioned briefly above, the euro lost ground, shedding 0.15%, as the common currency was weighed down by another lacklustre set of PMI figures. July's flash PMI data showed the manufacturing sector remaining in contraction, though the slowdown has deepened with the index falling to a 79-month low at 46.4. Meanwhile, despite the services sector maintaining a relatively solid pace of expansion, with a PMI of 53.3, the composite gauge (which measures output from both sectors) fell to a 3-month low of 51.5. Such a fall once again evidences the divergence between the services and manufacturing sectors, in addition to showing how economic momentum across the bloc remains weak.
Across the pond, the dollar held steady amid subdued trading conditions, largely as a result of a lack of major economic releases in addition to market participants beginning to look towards next week's Federal Reserve policy decision. Wednesday's only notable data release was June's new home sales figures, which were slightly softer than expected but had little market impact. Meanwhile, the day's worst performer was the Aussie dollar, which shed 0.3% after breaking through a number of key technical support levels.

Away from FX, European equity markets largely trod water, the pan-continental Stoxx 600 gaining just 0.1%, with market participants trading cautiously ahead of today's ECB policy decision. In the US, the benchmark S&P 500 closed at a fresh record high, adding just under 0.5%. Finally, oil prices slid, both Brent and WTI settling more than 1% lower despite a large draw in inventories and lingering tensions in the Middle East.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1200 1.1228 1.1048 1.60%
GBP/USD 1.2475 1.2705 1.2381 2.55%
EUR/USD 1.1135 1.1371 1.1126 2.15%
GBP/AUD 1.7905 1.8172 1.7630 2.98%
GBP/NZD 1.8630 1.8960 1.8368 3.12%
GBP/CAD 1.6380 1.6642 1.6145 2.99%

Today's Market Highlights

Today is ECB day, with focus falling on how dovish President Draghi will be, after recently stating that 'additional stimulus will be required' should the economic outlook not improve. With the outlook showing little sign of any improvement, markets are braced for impact, though my base case remains that additional stimulus is unlikely to arrive until September when the ECB release their latest macroeconomic projections. Hence, today is likely to see rates remain on hold, though policymakers are likely to use this lunchtime's policy decision to signal that rate cuts are on the way. This should be shown by altering their forward guidance, indicating that 'rates will remain at their present levels, or lower, at least through the first half of 2020', giving a clear sign that a deposit rate cut is on the way. However, there is a realistic risk that policymakers see little reason to wait another 6 weeks to deliver additional stimulus, with the market pricing a roughly 35% chance that Draghi attempts to 'out-dove' the market by announcing an immediate 10bps cut to the deposit rate. Should such a dovish surprise occur, EUR/USD is likely to fall below the $1.11 handle for the first time in over 2 years. Barring the immediate policy decision, markets will be on alert for any hints of the ECB restarting their quantitative easing programme as well as the possibility of tiering the negative deposit rate to mitigate the negative impact on banks' profitability. Meanwhile, remarks from President Draghi on the relatively bleak economic outlook and continued uncertainties stemming from global trade tensions will be also be closely watched.
Elsewhere, economic releases are likely to take a backseat, with focus being squarely on the ECB's policy decision. No major releases are due from the UK, where focus will remain on ongoing political developments, with PM Johnson possibly a dressing the Commons today before summer recess. Meanwhile, from the eurozone, July's German IFO sentiment survey is set to show business sentiment falling to 97.1, the lowest level since November 2014, a concerning sign from Europe's largest economy.
From the US, today's main release will be June's durable goods orders data, a useful leading indicator for production in the coming months. Orders are set to have increased for the first time in 4 months, ticking up by 0.7% MoM last month. The less-volatile orders measure excluding defence and aircraft will likely soften slightly, increasing by just 0.2% MoM. Today's only other notable release from the US will be weekly jobless claims, expected broadly in line with the 4-week average at 219k.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:00am EUR German IFO Business Climate (Jul) 97.1 97.4
12:45pm EUR ECB Interest Rate Decision (Refi Rate) 0.0% 0.0%
12:45pm EUR ECB Interest Rate Decision (Depo Rate) -0.4% -0.4%
1:30pm EUR ECB Monetary Policy Statement & Press Conference
1:30pm USD Weekly Jobless Claims (Jul 19) 219k 216k
1:30pm USD Durable Goods Orders (Jun) 0.2% 0.5%