Week Ahead ECB to Focus on Brexit Aftermath

The ECB is Expected to Show the Same Caution as the Fed and BoE

The European Central Bank (ECB) is up in the economic calendar as the next major central bank to follow the Brexit aftermath. The ECB is expected to keep rates and quantitative easing (QE) measures unchanged with the focus for investors being the words of President Mario Draghi that will address the central bank’s response to Brexit risks. The European Central Bank (ECB) will publish its benchmark rate statement on July 21, at 7:45 am EDT to be followed by President Mario Draghi’s press conference at 8:30 am.

The quick transition between former Prime Minister David Cameron and new PM Theresa May brought stability back into global markets as risk appetite increases across asset classes. The biggest boost to the British pound was the decision by the Bank of England (BoE) to keep rates unchanged on Thursday. BoE Governor Mark Carney said in comments following the Brexit vote that monetary policy easing would be needed over the summer. That leaves the August 4 meeting as the most likely to see a change in policy to directly combat the forecasted effects of the decision to leave the European Union.

Strong U.S. retail sales data made a case for the much-awaited comeback of American consumers. The healthy gain of 0.7 percent in core retail sales (excluding auto) beat forecasts of 0.4 percent. Retail sales grew by 0.6 percent showing a significant improvement as wage increases and energy discounts have boosted consumer spending. Eleven of the 13 retail categories improved from last month.

The EUR/USD gained 0.147 percent in the last week. The single currency has been stable only showing a 1.35 shift between the high and low of the last five days. The EUR continues to be impaired by the potential fallout from the British exit from the European Union. After risk appetite returned to markets and stock markets and currencies gained the EUR had a slight recovery. European data was few and far between while the USD got a boost from retail sales and inflation data on Wednesday.

The EUR/GBP lost 1.484 percent as the pound was boosted by the decision of the Bank of England (BoE) to leave rates unchanged in July after some analysts were expecting a rate cut after the words of Governor Mark Carney. The August 4 meeting dubbed a “super Thursday” due to the number of releases by the central bank is now widely expected to be the one where a rate cut is delivered. The quick switch from outgoing Prime Minister David Cameron and incoming (after opposing candidates dropped out) Theresa May was well viewed by markets with recoveries in both equity and currency markets.

The return of fundamental data both as hard economic data and central bank rhetoric has started to lift the heavy fog left behind by the Brexit vote. Since the release of the U.S. non farm payrolls (NFP) that was dampened by the rarified trading atmosphere following the shock vote outcome, the Bank of England (BoE) decision to keep rates unchanged and the strong retail and inflation data in the U.S. had the anticipated effects on the FX, equities, commodities and fixed income markets.

The ECB does not have the best track record in who to best influence the direction of the market. The December and March policy meetings had the central bank pull all the stops to the underwhelming response of markets. The ECB bazooka has proven ineffective but not so much the rhetoric that has provided false expectations leading up to major monetary policy decisions. Mario Draghi is anticipated to follow in the foot steps of Janet Yellen and Mark Carney and provide a cautious tone but without much action until the true effects of a Brexit can be quantified and addressed.

Market events to watch this week:

Monday, July 18
9:30pm AUD Monetary Policy Meeting Minutes
Tuesday, July 19
4:30am GBP CPI y/y
5:00am EUR German ZEW Economic Sentiment
8:30am USD Building Permits
Wednesday, July 20
4:30am GBP Average Earnings Index 3m/y
4:30am GBP Claimant Count Change
10:30am USD Crude Oil Inventories
Thursday, July 21
4:30am GBP Retail Sales m/m
7:45am EUR Minimum Bid Rate
8:30am EUR ECB Press Conference
8:30am USD Philly Fed Manufacturing Index
8:30am USD Unemployment Claims
Friday, July 22
8:30am CAD Core CPI m/m
8:30am CAD Core Retail Sales m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency
trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza