Dollar firmer as stocks fall

Yesterday’s ECB meeting proved to be something of a non-event for markets, as the central bank left interest rates unchanged as expected and gave little away about its next move, while the dollar gained ground amid a sell-off in equity markets. The US currency has extended its gains overnight and is currently trading at around $1.0880 and $1.2925 versus the euro and sterling respectively. EURGBP is largely unchanged meanwhile, trading at around £0.8420. UK retail sales released earlier this morning came in a good bit weaker than expected in June, but this has had little impact on the pound so far.

European equity markets remained under pressure, closing lower for a fourth straight session, while the main indices in the US all finished in the red with the S&P 500 shedding almost 1% as it retreated further from Tuesday’s all-time high. In government bond markets, US 10-year yields rose on the day, despite the fall in stocks, increasing by around 5bps, while German yields also nudged higher.

The ECB statement accompanying yesterday’s interest rate decision said “incoming information broadly supports (its) previous assessment of the medium-term inflation outlook”, which is for a return of inflation to the 2% target over the second  half of 2025. It again noted though that “domestic price pressures are still high, services inflation is elevated and headline inflation is likely to remain above the target well into next year.”

Regarding the ECB’s next meeting in September, Christine Lagarde said the interest rate decision then “remains wide open.” However, if the ECB’s updated projections in September continue to point to inflation returning to target over the second half of 2025  – as seems likely viewed from the current juncture – then it will probably lower interest rates again. The market sees a circa 80% chance of a quarter-point cut, little changed from before yesterday’s meeting.

Retail sales volumes in the UK fell by 1.2% in June according to this morning’s data. This followed an outsized gain of 2.9% in May, which in turn came after a sizeable decline in April. Looking through the volatility in the monthly outturns, sales volumes were essentially flat in the second quarter after increasing by almost 2% in Q1.

It is quiet end to the week in terms of economic data with little of note due. The ECB publishes its latest Survey of Professional Forecasters, while a couple of Fed members are scheduled to speak through the course of the day.