FOMC Position Unchanged, UK Retail Sales in Focus

European indices are expected to open relatively unchanged on Thursday as investors digest last night’s FOMC minutes and position themselves ahead of U.K. retail sales data this morning.

Last night’s release of the FOMC minutes was very important for the markets as investors continue to seek clues on the timing of the first rate hike in almost a decade. As it turned out though, there was little to be learned from the minutes themselves and as is often the case, people seemed to simply take from them what they wanted to.

The minutes can quite often leave themselves wide open to this kind of confirmation bias as they fail to commit either way. Some people are now adamant that the first hike will not come until next year while others claim September is still the likely lift-off date. In reality, it probably doesn’t matter either way as any hike is only going to be small.

In the minutes, the Fed claimed that the conditions for a rate hike are approaching but are not quite here yet. The simple fact is that this doesn’t tell us anything about what exactly would have to change in order for conditions to warrant a hike. The other issue with the minutes is that the meeting came before the Yuan devaluation so we don’t know whether that has impacted the Fed’s decision making.

We’re going to have to wait and see what policy makers have to say in the coming weeks as we near the September meeting. There is clearly a desire to raise rates at the Fed, it’s just not clear at this stage whether everyone is quite on board yet for a September hike to occur. If anyone at the last meeting was still on the fence, the Yuan devaluation may have just tipped them over the edge into the dove camp.

Focus this morning will switch to the U.K. where retail sales data for July will be released. As is the case in the U.S., the U.K. is facing the prospect of higher rates soon with the Bank of England suggesting it could come around the second quarter of next year, although that seems to constantly be changing. The problem that the BoE faces is similar to the Fed, the inflationary pressures just aren’t there at the moment.

If we can continue to see improvement in consumer spending numbers, this should both lead to price inflation down the road and convince the BoE that consumer inflation expectations are not being lowered by the current low inflation environment. As the central bank has said on numerous occasions, the main drivers of deflation in the U.K. are temporary factors that actually provide a boost to the consumer and should be a net benefit to the economy. Annual retail sales increases of more than 4% this year would support that view as well as the one that price inflation will inevitably follow.

Yesterday’s successful vote in the Bundestag on the Greek bailout should ensure that the European Central Bank is paid the €3.2 billion it is due today. There was a time when the country’s ability to make this payment was seriously in doubt but its actions over the last month have surprisingly ensured a smooth process in reaching an agreement on the bailout and it being in parliaments throughout the euro area. This has all come as the central bank has apparently cut its emergency liquidity assistance to Greek banks as liquidity conditions have improved in the country.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.