FX News Today
European Outlook: Asian stock markets moved mostly higher overnight, as Yen weakened and as Japan’s Abe is reportedly considering stimulus worth 20 trillion yen, almost double the previous plan, after the U.K.’s decision to leave the EU. U.K. stock futures meanwhile are heading south and U.S. stock futures are also mostly in the red. Mixed leads then for European markets, which will likely be cautious ahead of the ECB meeting today. We expect Draghi to stick to the wait and see stance for now, even if the changed growth and inflation outlook may force the ECB to tweak the QE program again in September, when the next set of forecasts are due. The calendar has French business confidence as well as production data and U.K. retail sales.
RBA Expected to Ease Policy in August: The Reserve Bank of Australia left the door wide open for another rate cut in August if the Q2 CPI report reveals tepid price gains or another quarter of outright price declines. Recall that a drop in Q1 CPI triggered an unexpected rate cut in May. With the pace of GDP growth expected to moderate in Q2 while the global growth outlook remains uncertain, evidence of persistent disinflationary pressures should trigger another rate cut.
US Market Reports: U.S. equities extended gains to fresh highs in the wake of the latest earnings surprises from Morgan Stanley and Microsoft, gathering steam again after their initial pullback from opening gains. Some risk barometers are switching to overdrive, with USD-JPY marked session highs of 106.80 and the VIX equity volatility index down 3.2% to 11.59 (11.40 lows) with an eye on year lows of 10.88 on August of last year. Risk proxy gold, has also traded down to $1,313 overnight and is struggling to clear $1,320.
Reuters poll: 60% probability of recession in UK over the coming year as a consequence of the activity-disrupting uncertainty thrown up by the vote to leave the EU. The median view is for 0.0% GDP in Q3 and -0.1% in Q4. For 2016 as a whole, growth is seen at 1.4%, down from 1.9% at the previous (pre-Brexit) survey, and for 2017 growth is seen at 0.6%, hacked from 2.1% previously. The BoE is expected to cut the repo rate to 0.25% at the August MPC meeting, down from 0.50%, with a minority expecting a cut to zero. The consensus view is for the repo rate to then remain unchanged at 0.25% until the end of 2018 (at the previous poll in early June the view was for the repo rate to be at 1.25% by the end of 2018). The Old Lady is also expected to dust off the QE program next month, which has been on hold since 2012, and expand bond purchases by another GBP 80 bln, adding to the GBP 375 bln already bought.
Main Macro Events Today
- ECB Preview The ECB is likely to maintain the wait and see stance at today’s council meeting, although Draghi is likely to keep the door to further measures wide open. The Brexit vote wasn’t quite the Lehman moment some had feared, but there will be long term implications for the growth and inflation outlook though is clear but for now the ECB is likely to keep its powder dry as the BoE already did at its July meeting. For Draghi the next important date is the September set of updated forecasts and staff projections, which are likely to bring downward revision to growth projections and we expect the ECB to make some changes to its monetary policy then, although it is unlikely to be more than some tweaking of the QE program. Rate Announcement – 11:45 GMT Press Conference 45 minutes later at 12:30.
- UK Retail Sales Expectations are for a fall to -0.6% from 1.0% for Retails sales ex- fuel. (MoM). YoY sales are expected to drop to 5% from 6%.
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