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ECB the main event after Bank of Japan holds

While most of the focus this week has been on today’s European Central Bank rate meeting, the Bank of Japan also met earlier today, and unsurprisingly left policy unchanged, though they won’t have been happy at the recent rise in the Japanese yen against the US dollar. The bank also cut its inflation target to 1.1% as well as pushing back the timing of achieving its inflation target in line with expectations.

Today’s ECB rate meeting has been touted as an important milestone in the context of how the central bank and ECB President Draghi in particular will manage the communication process of the enormous task of preparing the ground for the slow process of withdrawing from its large scale stimulus package.

We’ve already seen German bund yields shoot up sharply in the last three weeks from 0.24% in expectation of a slightly less dovish outlook as the European economy improves, as markets bet that it is only a matter of when the ECB starts preparing the ground for a slow retreat from its stimulus programme.

ECB officials aren’t being helped in by political events playing out in the US which is undermining the US dollar, and means that the ECB’s task in managing monetary policy is akin to playing a game of monetary Jenga with bond yields, which if they rise too quickly along with the euro could start to hurt the weaker parts of the European recovery story.

While no change in policy is expected today it is against this backdrop that ECB president Mario Draghi will be looking to manage expectations about the timetable for future monetary policy, with markets expecting some form of clarity as soon as the September meeting, by way of the Jackson Hole Central Bank annual symposium in August where we might get further clues.

Earlier this week we saw some evidence that the income squeeze that UK consumers have been experiencing in the last few months may be starting to abate after CPI inflation dropped back sharply from 2.9% to 2.6% in June, helped in large part by falls in fuel prices as well as recreation and culture services.

With average wages in the three months to May showing an increase to 2% from 1.7%, there is some optimism that we could be seeing the early signs of a pickup in wages growth at the same time that prices may be hitting their own high water mark.

Optimism about this could well increase later this morning if retail sales for June reflect this increase in spending power, given that we saw a fairly poor performance in May where retail sales declined 1.2%, though this does need to be set against a strong performance of 2.5% in April.

We already have seen earlier this month that retail sales under British Retail Consortium figures showed an increase of 1.2% for June, so this should bode well for a similarly positive performance as far as the ONS numbers are concerned.

A good number should also be a decent arbiter for how we ended Q2. Expectations are for a rise of 0.4% in June, which if confirmed should see a fairly decent quarter for UK retail sales after a first quarter, which acted as a drag on the economy. 

Forex snapshot

EUR/USD – we remain on course to test the 2016 highs at 1.1617, with support now at the 1.1480 area. If we break below the 1.1480 area we would then be susceptible to a pullback towards the 1.1300 area. Only a move below 1.1280 opens the possibility of a move back to the 1.1100 June lows.

GBP/USD – despite falling back from the 1.3120, the pound has managed to hold above the 1.3000 area, keeping the prospect of a move towards 1.3300 on the table. A move below 1.3000 could well trigger some stops towards 1.2930, but while above 1.2900 momentum remains positive.

EUR/GBP – the 0.8820 level now becomes a key support level after this week’s failure at the 0.8900 level, which just about keeps the bearish outlook intact after last week’s bearish reversal. A break below 0.8820 retargets the 0.8760 area.

USD/JPY – if we break below the 111.50/60 area and the 200 day MA we could well head back towards the 110.20 area. We need to recover back through the 112.30 area to look at a retest of the 113.20 area. Below 111.60 opens up the 110.20 area.


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