Global market watch - 23rd July 2021
European trading started with a ‘risk on’ theme with the pound gaining across the board. This was despite BoE Deputy Governor Broadbent that although the extent of the rise in inflation has been surprising the appropriate response to it may be to do nothing. The ECB left the pound relatively unmoved as did news that a record 600k UK citizens have been instructed to self-isolate by the Covid app. This morning we have just had the release of retail sales data which showed an increase of 0.5% from last month’s 1.4% decline and was probably due to the start of food and drink buying as the Euros football tournament starting.
Euro trading was mixed before the ECB interest rate decision and press conference where the Governing Council decided to leave monetary policy unchanged. Regarding the new inflation target It was stressed that the ECB’s forward guidance implied that they would allow inflation to be above target (as it is considered transitory) before they change monetary policy. Mme Lagarde expanded on this and said that the price outlook ‘must reach 2% well ahead of the end of the projection horizon.’ It was also noted that weak wages and euro gains meant that prices would remain subdued.
Overall, despite the market hoping for more information around the timing of changes to monetary assistance President Lagarde was at pains to stress the forward guidance part of monetary policy and confirmed that the ECB would continue to be persistent in its current path. The market wanted to hear more about the end of the Pandemic Emergency Purchasing programme (PEPP) but the ECB stuck to its line that a decision would be made in the Autumn. It was a slightly dovish message but not as dovish as the market wanted. Hence EURUSD initially strengthened before falling back to close slightly lower on the day.
The US Dollar slipped in early European trading as the market took note of the previous days US equity gains and higher US bond yields. The unemployment claims were a disappointment for the market as they showed a rise of 51k on last week’s 368k and not the 10k decline the market had hoped for. This was pointed to as a possible reason to slow the Fed from prematurely tapering its bond programme.