European stocks and bonds rallied and the euro fell after the ECB conveyed a modestly dovish tone in their governing council meeting yesterday.
The Governing Council announced that net asset purchases are expected to fall from €30bn to €15bn per month in Q4 and then end in December 2018 and that the first DFR hike would occur no earlier than September 2019.
This change in forward guidance was on the more dovish side, versus our expectations of a first hike in June 2019. Following the meeting, we have pushed out our forecasts for the monetary policy path by three months: we now expect the first DFR hike of +15bp to be delivered in September 2019, followed by a +25bp hike in the DFR and MRO in Q1 20.
GBPUSD followed EURUSD lower, then underperformed on headlines that the government faces further rebellions over the Lords’ amendments next week. GBPUSD support comes in at 1.3200 ahead of 1.3000 with resistance at 1.3450.
Both US and UK May retail sales beat expectations yesterday. US retail sales rose 0.8% m/m driven by gasoline station sales and building materials. We have revised our Q2 US GDP forecast to 3.5% q/q to take account of stronger private consumption. UK retail sales rebounded strongly in May thanks to warm weather and royal wedding celebrations. However, we still expect Q2 GDP growth of 0.4% q/q with downside risks since retail sales have been the most optimistic indicator in May.
Focus today will be on the Central Bank of Russia meeting, where we expect the CBR to make its final 25bp rate cut of this cycle as the sharp drop in the ruble has not had a significant impact on inflation which has remained at all-time lows.