Investors turn to pivotal ECB meeting after dovish strategy review

GBP

Sterling bounced after broad dollar depreciation in yesterday's market, with GBPUSD rallying some 0.64% over the course of the day and shrugging off the persistently high virus case count and growing post-Brexit concerns over the Northern Irish protocol. The EU-UK spat was back in the picture after UK's chief Brexit negotiator, David Frost, demanded the EU to agree to rewrite a deal overseeing problematic trade involving Northern Ireland. This was however rejected by the EU, with EC Vice President Maros Sefcovic explicitly stating the EU will not agree to a renegotiation. The headlines did little to hinder cable's intraday moves. The main focus for sterling traders will be how FX markets digest the global economic backdrop, while some focus today will be on the ONS' release of real-time economic data at 09:30 BST. The timely data on retailing, consumption, and population mobility will be viewed in the context of the broader health backdrop and how consumers are behaving amid it. This data is released prior to tomorrow's preliminary PMI data for July and June's retail sales data.

EUR

After three days of little data and no new broader macro trends failed to send the euro in new directions, today's European Central Bank policy decision will be widely watched by markets in the hope that today's session will pave the way for monetary policy debates over the summer and in September. While no actual changes in policy as of yet are expected, ECB President Christine Lagarde promoted the meeting well by stating it will be an important meeting and promising more 'plain English' in her opening statement, challenging herself to deliver simpler language aimed at a broader audience while still conveying her message well. The policy decision comes after the ECB concluded its strategy review in which the focus lay on a more flexible inflation target going forward - a decision that may help the eurozone to move away from the years of low inflation expectations. The ECB has now formally adopted a symmetrical inflation target, replacing the 'below, but close to, 2%' target. This means that inflation overshooting that is considered to be transitory will be tolerated, although formally it means undershoots and overshoots are equally undesirable. The policy announcement is at 12:45 BST and is followed by the usual virtual press conference at 13:30 BST.

USD

The dollar finally pared recent gains in the afternoon of yesterday's session as FX markets realigned with equity and bond markets after days of being disconnected. Risk appetite was better supported in yesterday's market, with US equities posting gains for the second day in a row, while the US 10-year threatened to make a sustainable break above 1.3%. The reflation trade is seemingly back on after days of concerns centring around the rise in Covid-19 cases. The dollar's decline was substantial, with the DXY index falling around a quarter of a percentage point, with currencies like AUD posting gains on the day despite isolated Covid risks and growth restricting lockdown measures remaining in place. Overnight, Joe Biden stated that persistent inflation isn't a worry but the hospitality sector may take longer to recover due to increased employee power. Meanwhile, people familiar with the matter stated that Jerome Powell is favoured to retain his job in 2022 and is receiving broad support among top White House advisers, although officials are still keeping an open mind with Governor Lael Brainard tipped to be his likeliest successor. Today, the dollar continues to retrace as markets favour procyclical assets again. On the data front, initial jobless claims data at 13:30 BST stands out as that with the highest market impact.

CAD

The Canadian dollar's near percentage point gain placed it as the second-best performing Expanded Majors currency yesterday, with the loonie falling short to only the Norwegian krone. The turnaround in the broad dollar and risk sentiment yesterday was the predominant driver for CAD, which has been hit hard over previous trading sessions due to its exposure to global growth conditions and sensitivity to US equity returns and oil market price action. On the domestic front, news in Canada focused on the appointment of Sharon Kozicki as Deputy Governor, with the appointment bringing the Governing Council to six people next month. Kozicki, currently an adviser at the Bank, will assume the role on August 2nd, and will share responsibility in overseeing the Bank's financial system activities until Carolyn Rogers starts her job as Senior Deputy in December. Today, the data calendar is light for the loonie, placing the emphasis on broader market dynamics yet again. The Canadian dollar is lagging the rest of the G10 move this morning as oil prices fail to make further ground above the $70 handle, but further dollar weakness will likely result in CAD returning to trading in the green.

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