Spectrum FX Daily Report

June retail sales unexpectedly printed flat yesterday, while the number excluding auto sales rose by 0.4%, well above the +0.1% pencilled in by economists. This will no doubt raise optimism around the state of the US economy, and there appears a general consensus that activity rebounded in Q2 following the relatively weaker showing in Q1.

Most currencies traded somewhat lower on the greenback on the back of the data, although the move was rather limited. Investors see little real impact of the news on Fed interest rates, with futures now seeing around 65 basis points of US cuts during the remainder of the year - in other words, two full 25bp cuts, with a more than 50% chance of three.

UK inflation remained unchanged in line with the BoE’s 2% target this morning. Attention now turns to Thursday’s European Central Bank announcement. No change in policy is seen, but President Lagarde may hint at another rate cut when the bank next convenes in September.

We’ve seen somewhat of a rebound in the dollar in the past few trading sessions. in part due to the growing likelihood of a Trump election win and evidence of resilience in US economic activity. Following the shocking assassination attempt over the weekend, both the bookmakers and political prediction website PredictIt are now assigning around a 70% probability that Trump regains the presidency. This has raised the likelihood of greater protectionism and a return to his ‘America First’ approach, which investors view as bullish for the dollar.

Comments from FOMC chair Powell earlier in the week have largely been taken in stride. Powell sounded relatively dovish, signalling increased confidence that US inflation would return to the 2% target. We think that this is a very clear signal that lower rates are on the way at the bank’s September meeting, with the FOMC likely to indicate as much when it next convenes later in the month. Industrial production and housing data will be in focus on Wednesday afternoon.

This week will be all about Thursday’s European Central Bank announcement. The economic landscape has changed little since last month’s ECB meeting. Inflation fell slightly in June, although price pressures in the underlying index proved more persistent. Economic activity appears to be slowing, however, and the argument in favour of additional policy easing is a strong one. The Governing Council will use this week’s meeting to pause and reassess. Lagarde will once again point to a desire for a meeting-by-meeting approach and data-dependence, and may refrain from tieing the Council’s hands by providing overly clear forward guidance. Regardless, with a September cut nearly 90% priced in by swap markets, we would not expect a significant sell-off in the euro, even if she were to outright confirm a September cut.

The June inflation data out of the Euro Area this afternoon will be a revision from the previous data, so don’t expect any real reaction in the euro unless we see a sizable change from the initial estimate. All eyes will be on Lagarde’s remarks tomorrow, as no other major data will be released in the common bloc in the next few days.

Sterling continues to outperform its major peers, buoyed by resilient UK activity data and hopes of closer UK-EU ties under a Labour government. This morning’s CPI report showed that inflation remained in line with the BoE’s 2% target for second straight month in June, its lowest level in 3 years, while core inflation again printed at 3.5% (both in line with estimates). This has done little to shift expectations for the timing of lower UK rates, with markets still seeing an August BoE rate cut as effectively a coin-toss.

This week is an important one for economic data in the UK, with the latest labour data to be released on Thursday morning. Economists are eyeing an easing in wage growth, and we would not be overly surprised to see another uptick in the jobless rate. This may be enough to solidify expectations for a first Bank of England interest rate cut in August, which could trigger some GBP downside.

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