resident Mario Draghi will, this afternoon, be announcing the ECB’s latest policy decision with markets poised for the possibility that he could hint a tightening of policy is likely to be on the way later this year. However, given the already strong reaction in the market and recent rapid rise in the Euro, Draghi may be reluctant to provide any signals that a tapering in the QE programme is possible this year.

While economic activity in the currency bloc continues to impress, inflation is also still well below the central bank’s “close to but below” 2% target. Headline inflation actually fell short of consensus in June and has now fallen back to just 1.3%, its lowest level since December. We therefore still remain of the opinion that policymakers would need to see a more sustained rebound in consumer prices, particularly core inflation, before committing to a winding down in its stimulus programme.

A more cautious statement today that emphasises more of the same would likely weigh on the single currency this afternoon and send the Euro back towards the 1.14 level against the US Dollar.

UK retail sales provide next test for Sterling

The Pound edged back towards the 1.30 mark against the US Dollar on Wednesday, retreating from around its strongest position in ten months following Tuesday’s slightly disappointing inflation news.

Next up for Sterling is this morning’s retail sales data, which may give us a firmer indication as to whether the Bank of England is likely to hike interest rates for the first time in a decade later this year. Sales are expected to have bounced back in June from the rather dismal seven year low recorded in May. It would, however, take a massive positive surprise for the market to begin repricing in a BoE rate increase in 2017. Financial markets are now only pricing in around a 40% chance of a rate increase in the UK this year, having given it in excess of a 50% chance before Tuesday’s news that inflation had slowed to 2.6% in June.

Dollar sell-off takes a breather

The US Dollar sell-off paused for breath on Wednesday, although lingering doubts over Donald Trump’s ability to push through any sort of policy changes continue to cloud the outlook for the currency. This, combined with the growing doubts that the Fed will hike interest rates again this year, has seen the greenback retreat by over 6% in a little over three months.

Jobless claims this afternoon will be the only domestic economic release in the US today. The Dollar will instead be driven almost entirely by the news out of this afternoon’s European Central Bank meeting.