Sterling on the back foot

The ECB left interest rates unchanged yesterday, as widely expected, with Christine Lagarde saying the central bank is now “on hold” and in “wait and see” mode as it awaits further developments in relation to the current EU-US trade talks in particular. The market has pared back expectations for any further policy easing though and is no longer pricing in a full 25bps cut in the deposit rate from the current 2%. Despite this, the euro is slightly softer against the dollar from yesterday morning, trading at around $1.1750, though it is firmer against sterling, hovering above £0.87 (and closing in on its 2025 to date high of circa £0.8740 in mid-April). The latter largely reflects the weakness of the pound – which has also fallen against the dollar, to around $1.3480 – following the release of some softer than expected UK economic data over the past 24 hours, including retail sales a short while ago, copper-fastening the case for another Bank of England rate cut at next month’s meeting.

The paring back of ECB rate cut expectations has contributed to a jump in German government bond yields, with 2- and 10-year yields both up around 10bps from Wednesday’s close. UK yields are largely unchanged over the same period, reflecting the soft economic data, while US yields are marginally higher. Equity markets took a breather yesterday, following a solid performance the previous day, chalking up very modest gains, though the S&P 500 still closed at a new all-time high.

This morning’s retail sales data in the UK show spending volumes rose by 0.9% in June, shy of the 1.2% increase expected and only partially reversing May’s fall of almost 3%, while for Q2 as a whole sales rose by just 0.2% from Q1. Meanwhile, yesterday’s PMI data showed a decline in the composite index to 51.0 in July from 52.0 in June, “indicative of the economy struggling to expand” according to the release accompanying the data.

Looking to the day ahead, economic data due include money supply/credit growth in the Euro area, the IFO business confidence index in Germany, and durable goods orders in the US, while the ECB publishes its latest Survey of Professional Forecasters.