Lower rates for longer not welcomed by all ECB members

GBP

After another strong session on the back of broad USD strength yesterday, the pound is trading more sluggish this morning. A beat in June's retail sales data this morning failed to reignite the rally in the pound as it continues to trade over a tenth of a percentage point lower against the dollar. The 0.5% MoM reading came in above expectations of a 0.1% contraction, but the beat in retail sales volumes was largely due to transitory factors. Food store sales rose by 4.2% due to the start of the Euro 2020 football competition, but retail sales volumes moderated in non-food stores by 1.7%. The transitory boost to the headline number meant that markets chalked off the data release, along with timely data showing that the decline in non-food store sales likely reversed in July with credit and debit card spending data showing an increase in spending on non-food household goods. Sterling will likely take more cues from July's preliminary PMI data which was released at 09:30 BST this morning as the series gives a better indication of the UK economy amid the broader reopening and more concerning health backdrop. Expectations are for a slight moderation in both the construction and services PMI, which would result in the composite reading falling from 62.2 to 61.5. Any substantial beat in the data, specifically in the services reading, could push GBPUSD back towards its opening price and closer to breaking even on the week.

EUR

The European Central Bank added more conditions for policy normalisation in its monetary policy decision yesterday, outlining that the inflation outlook must reach 2% well ahead of the forecast horizon and must be durable at 2% for the remainder of the projection period. This adds colour to the symmetric inflation target of 2% that was announced earlier this month at the strategy review, when the ECB changed its inflation target from 'below, but close to, 2%' to a symmetrical target. By adding these new parameters, the ECB arguably makes its own job more difficult as this means more is needed for the central bank to start raising interest rates while markets deemed the prospect of interest rate hikes unlikely in the near future to begin with. Financial markets took the dovish stance from the ECB as a positive initially, with German bunds spiking up while EURUSD reached weekly highs before it pared back gains. The press conference added little additional detail over what the new policy framework means for future monetary policy actions, leaving markets in the dark about the trajectory of asset purchases. Shortly after the meeting, Bundesbank President Jens Weidmann and Belgian Governor Pierre Wunsch opposed the new policy guidance as they were concerned the decision could be perceived as making too much of a long-term commitment to loose monetary policy. While markets continue to digest the ECB news, focus today turns to eurozone purchasing managers' index figures at 09:00 BST.

USD

Yesterday's session included a modest recovery in the US dollar after the DXY index fell by the most in over a week, suggesting that the dollar bulls remain in control in FX markets in the short term as levels remain near April's highs. Initial jobless claims increased against expectations, while continued claims declined by less than expected, although these continued to trend down in states which ended enhanced benefits early. This morning, the dollar continues to trade higher as continued worries around the Delta variant and broader market sentiment trigger flows into the safe-haven dollar. On the calendar today will be Markit's preliminary purchasing managers' index figures for July at 14:45 BST which may also serve as a source of concern as both supply chain issues and staff shortages may have weighed on activity in the US.

CAD

The Canadian dollar's 2.2% swing against the US dollar this week marks it as one of the most volatile currencies within the G10 space. After retracing losses sustained earlier in the week on the back of an OPEC+ production deal and Covid-19 concerns, the loonie now trades a quarter of a percentage point higher as WTI sits stable above the $70 handle again. However, with the dollar back in focus again this morning, the loonie is back under pressure and sits 0.1% lower on the day. Retail sales data released at 13:30 BST is unlikely to distract the Canadian dollar from broader market price action, largely due to its lagged nature. Consumption data for May during the latest lockdown measures doesn't represent current economic conditions on the ground now restrictions have been loosened. Nonetheless, the data will be viewed to assess how big of a toll the latest lockdown measures had on the Canadian economy with expectations sitting at a 3% MoM contraction.

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