he US Dollar briefly jumped by almost half a percent against the Euro after the FOMC’s ‘dot plot’ proved to be more hawkish than expected, albeit it ended up giving back the entirety of these gains. Short term rate forecasts were shifted marginally higher, with the median dot for this year indicating two more rate increases were on the cards, suggesting that the central bank is on course to hike again in September and then again in December. Chair, Powell, also struck a confident, upbeat tone of the strength of the US economy, saying it was approaching ‘normal levels’.

Growth forecasts were revised higher, with the Fed now expecting a slight overshoot of inflation that would warrant short term rates to be marginally higher than their long term level. This was reflected in the long term rate projections, which were unchanged at 2.9%, versus the 3.4% for the end of 2020. With market pricing for four hikes jumping to close to a 50%, we now await any surprises from the ECB to see the next trend in EUR/USD.

European Central Bank to give clues on QE end date

Attention quickly turns to the main event in the markets today, which will undoubtedly be the meeting of the European Central Bank in Latvia. While no change in policy is expected, there has been growing speculation that policymakers will announce that discussions were had regarding the timing of an end date to its bond purchasing programme.

We think that there is more uncertainty than usual around this week’s meeting. While the improvement in inflation dynamics could well spark a discussion on a possible QE exit, we think that it is too soon for any concrete policy announcements from Mario Draghi. Even in the event that the ECB hints its asset purchasing programme could be brought to a close, we would only expect no more than a fairly modest, short term bounce in the Euro. The ECB continued to stress in recent meetings that any interest rate hikes, which remain the key to foreign exchange market movements, are a long way off.

Regardless, we expect a heightened degree of volatility surrounding today’s meeting following the rate decision at 12:45 UK time and following Draghi’s press conference less than an hour later.

UK retail sales jump by most since April 2017

The Pound spent much of Wednesday morning trading on the back foot following yesterday’s inflation miss, which remained unrevised in May after analysts had expected an upward revision.

Sterling did, however, recover this morning following an upbeat set of retail sales data. Amidst the stream of central bank news, UK retail sales jumped by 1.3% month-on-month in May, a much faster pace than the 0.5% expected, while growing at its fastest pace, year-on-year, since April 2017. This is very welcome news for the UK economy that supports the view that the economic slowdown witnessed in the first quarter of the year may prove temporary.