Good morning,

All quiet in Frankfurt for now

Much like a distant uncle’s birthday, the European Central Bank meeting this month has crept up on us, although little is really expected in the latest policy announcement. The ECB is in a bit of a predicament in that action is almost constantly expected from it on a month by month basis with this their first meeting post-Brexit.

It would be strange for the ECB to act in reaction to Brexit when the Bank of England hasn’t even done so yet but, much like with Governor Carney and the Monetary Policy Committee attempted last week, we are looking for some fairly overt signals from Frankfurt that whatever may come from the UK leaving the EU, the ECB will act to protect the European economy.

Weaker EUR depends on stimulus

In a world in which future Bank of England easing is almost guaranteed we would expect sterling to weaken to fresh multi-year lows, exacerbating the worsening of trade conditions in Europe, slowing growth and prompting a stimulatory impulse in the form of increased QE from the European Central Bank, as soon as September.

Any additional euro weakening is largely contingent on this further QE from the European Central Bank, however the already depressed nature of European government debt means that there is little extra room for yields to fall – 65% of German debt now yields less than the deposit rate and is therefore ineligible for purchase as part of the Bank’s QE plan. This will act as a barrier to substantial declines in the single currency.

We may get more from ECB President today on eligibility, but questions will continue to be raised on just how effective the current plan is. Inflation in the Eurozone remains at 0.1%, way off the 2% target and unlikely to get there anytime soon. Questions as to the viability of the European banking sector, in particular Italian banks, is something that will also come up in the Q&A.

The policy decision is due at 12.45pm with the press conference beginning at 1.30pm.

Forbes seen as vote to hold

Another Bank of England policymaker has voiced concerns about rushing to add additional stimulus to the UK economy following the Brexit decision. An external member of the MPC and policy bellwether wrote in an article for the Telegraph that “given the substantial uncertainty and likelihood that growth slows, there is a valid case to ease monetary policy to support demand…but until more hard data is available, I believe this is a good time to ‘keep calm and carry on.’”

She also suggested that lower interest rates can in fact tighten monetary conditions by lowering income from savings, restricting the incentives for banks to lend and cutting pension contributions. In the coming weeks we hope to hear more from members of the MPC but a split in the vote come August 4th is almost guaranteed with Vlieghe and Haldane likely to vote for a cut. We would suggest Weale, McCafferty and Forbes choose to hold off. That leaves four votes up for grabs and we would expect Carney’s sway to move those to what he thinks.

A pre-Brexit release of UK retail sales is due at 9.30am

Japan stimulus rumours abound

Overnight in Asia dollar strength continued to press regional currencies weaker although rumours of an additional Y20tn of stimulus in Japan will have also helped matters.

Have a great day.

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