ECB Pauses on Policy

In its latest decision, the Governing Council of the European Central Bank opted to leave monetary policy unchanged, leaving the asset purchase program operating at the same pace while the benchmark rate was held at 0.00% and the deposit facility remained at -0.40%.  While ECB President Mario Draghi made fewer comments on monetary policy during his press conference, he did focus on the banking system especially amid concerns that banks in Italy may be insolvent when considering balance sheets full of nonperforming loans.  To this extent, Draghi reiterated the need to address the bad asset problem, giving merit to the idea of a public backstop, especially during conditions that are considered extraordinary.  While Italian banking stocks responded to the calls, rallying to the upside, the Euro was unmoved by the comments, with the EURUSD pair ending the session just modestly higher after very little press conference volatility.

While limited data has been released since the British referendum late in June, figures relating to retail sales reported during the European trading session underlined the slowdown and contraction in economic activity in the lead up and aftermath of the vote.  The headline monthly retail sales figure fell by -0.90% during June versus expectations of -0.60% decline, matched by the core retail sales number for the same period.  Additionally, outside of retail which took a dive, public sector borrowing was also significantly lower, printing at GBP 7.31 billion during the month versus the GBP 9.41 billion lent during May to public entities. These indicators give credence to the idea of a looming recession that may force the Central Bank to ease interest rates.  GBPUSD has managed to hold onto the previous two session’s gains, trending near 1.3250 ahead of services and manufacturing data to be reported later today.