Good morning,

EUR: Draghi 4-0 Euro

The euro was given a kicking yesterday by the European Central Bank President Mario Draghi despite his announcement that the central bank, if the economic data warrants it, end its QE plan by the end of year. This initially popped EURUSD and EURGBP higher with the former hitting a one month high.

The weakness came in however as it became clear that the European Central Bank would not raise interest rates until at least next summer and that the reduction of stimulus via QE could be reversed should the economic data weaken. The decisions on guidance and rates were also unanimous which added to the euro negativity and has to limit the possibility of euro strength in the short term.

If ECB President Draghi’s plan was to announce QE but prevent investors from automatically pricing in interest rate hikes and sending EUR and debt markets into conniptions, then he played a blinder. The fact that the euro is 2.2% lower this morning compared to just before the rate decision will have probably seen Draghi celebrate a la Marco Tardelli at the 1982 World Cup as well.

In the short term the euro is going to remain under pressure although political risk in Italy has shifted to Germany with a possible confidence vote for Angela Merkel in the offing over opposition within her party to the level of immigration into the country.

GBP: Retail bounces back but sterling remains poor

Sterling rallied yesterday after May’s retail sales numbers showed that British shoppers returned to the High St last month. The UK retail environment is a tough one at the moment with businesses dealing with margin pressures and a changing demand and fulfilment landscape courtesy of the ecommerce sector while consumers are still under the yoke of almost non-existent real wage gains.

That being said, the British consumer can always be counted upon to hit the High St in preparation of an event such as the Royal Wedding or World Cup and where the weather was good. May had this in spades but we cannot begin to think that this is the beginning of a resurgence of High St strength yet.

The Lewisham East by-election passed with little fanfare with the Labour Party holding on to the seat with the Liberal Democrats taking 2nd place on a strong anti-Brexit platform; this should come as no surprise given the constituency’s geography and demographics.

Theresa May’s attempted mollification of both Remain and Leave elements within her party seem to have annoyed both groups and so, while the next Brexit headlines are not due until the EU summit on June 28th/29th, Westminster could provide some ructions in the meantime.

USD: More Trump, more tariffs

The dollar has taken advantage of the weaker euro and has also pushed GBPUSD within 0.2% of its weakest level all year. Focus returns today to Trump’s trade tariffs against Chinese goods. The US is expected to publish a list of Chinese products on which it intends to apply tariffs today with additional taxes falling on about $50 billion in Chinese imports. How China retaliates is a matter of when and not if.

We expect the USD to maintain its recent strength today.

Have a great day.

Jeremy Thomson-Cook, Chief Economist