Despite the moves of the last two days European markets have managed to hold on to most of the gains at the start of the week, while the resumption of Nord Stream 1, and yesterday’s ECB rate decision haven’t really changed the calculus that much.  

The decision to hike interest rates by 50bps was a surprise and appears to have been done with the intention of convincing the market that its new Transmission Protection Instrument, or TPI for short, (oh good another acronym), was a credible response to concerns about fragmentation risk.

If that was the intention the markets haven’t seen it that way, with the spread between German and Italian 10-year yields widening out to 232bps, and levels seen just over a month ago.

The ECB insisted that the tool could be used ex ante to deal with “unwarranted, disorderly market dynamics”, and that the governing council would decide on the eligibility of each member country on an individual basis for TPI implementation.

We did manage to establish that any country must comply with EU fiscal rules, fiscal and debt sustainability, sound and sustainable macro policies, and an absence of severe macro imbalances. On any measure there is no way Italy complies with all of these, which is a problem, and if it did there would be no reason for the TPI to be used, because the market would have confidence in the country’s governance. It is precisely because the market is having a crisis of confidence in Italy’s governance that spreads are widening.

This leaves a lot of unknowns, including how much the ECB is limited legally under the capital key in terms of how many bonds it can buy. Given the current political situation in Italy the market could well test the ECB’s mettle when it comes to the TPI, which in turn could prompt a legal challenge in the same way that the German Constitutional Court had to rule on the ECB’s previous bond buying program.

The reaction of the euro to yesterday’s decision was quite telling, initially pushing higher on the 50bps move, and then back down again when it became clear the TPI raised more questions than answers.

While yesterday’s European session was a mixed one, US markets saw another decent session, with the Nasdaq 100 leading the gains, despite earnings reports that were very much a mixed bag.

The outperformance of US markets appears to be being driven by the idea that deteriorating US economic data may temper further US rate rises next year after weekly jobless claims climbed above 250k and the latest Philadelphia Fed index dropped sharply to -12.3 in July.   

Today’s focus returns to the UK economy, and the latest June retail sales numbers in a month that saw CPI hit a fresh record high of 9.4%, with the sobering thought of even higher levels in the coming months.

It’s been a painful year for consumers in the UK, with record low consumer confidence and rising prices exercising an increasing pinch on disposable incomes since January.

The economic outlook hasn’t been helped by an increase in tax rates, which came into effect in April, at the same time as energy bills rose by 54%.

In April retail sales saw a positive number, however, were revised down heavily from 1.4% to 0.4%, with most of the improvement driven by sales of alcohol and tobacco in supermarkets, while fuel sales also rebounded.

In the May numbers which saw a decline of -0.5%, there was a notable slip in food sales.

As we look to today’s June numbers, and the final month of Q2, the Platinum Jubilee celebrations are likely to have seen a rebound in food sales because of the four-day bank holiday weekend, although with grocery price inflation of 9.9%, according to Kantar, this could well prompt another negative month.

Expectations are for a decline of -0.2%, but it could just as easily swing in the other direction. As far as Q2 GDP is concerned, it’s still likely to be a weak quarter for the UK economy. 

UK flash PMIs for July are expected to slow in both manufacturing and services from June levels.     

EUR/USD – failed to push through the 1.0275 area yesterday, before sliding back again. The main resistance still remains up at the 1.0340/50 area. Bias remains for a move below 0.9950, towards 0.9660, while below 1.0350. 

GBP/USD – continues to struggle above 1.2000 with the main resistance at the 1.2040/50 area. We need to push through the 1.2040/50 area to stabilise and target the 50-day SMA. Support remains at the 1.1870 area, with the bias remaining towards the downside while below the 50-day SMA.

EUR/GBP – spiked above the 50-day SMA at 0.8540 to 0.8586, just shy of 0.8600. As such the bias remains lower due to the failure to close above the 50-day SMA. While below the bias remains for a drift back towards the recent lows.  

USD/JPY – bias remains for further gains on a break above 139.40. A break of 140.00 targets the 145.00 area. Support comes in at the 135.80 level, as well as the more solid support at the 134.80 area. 

FTSE100 is expected to open 7 points higher at 7,277

DAX is expected to open 30 points lower at 13,216

CAC40 is expected to open 11 points lower at 6,190

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