Markets In Tight Range In Thin Holiday Trading

Markets are generally steady in tight range on thin trading as US markets will be on July 4 holiday today. Euro stayed in tight range against most major currencies as markets are awaiting tomorrow's ECB meeting as well as an important 10-year bond auction in Spain. Eurozone services PMI was revised higher to 47.1 in June. Sterling is mildly softer ahead of BoE rate decision but is basically just stuck in range. UK PMI services came in weaker than expected at 51.3 in June and added some weigh on the pound. Aussie was lifted mildly earlier today on stronger than expected retail sales figures but no follow through buying was seen. Canadian dollar also failed to extend yesterday's rally as Crude oil retreated ahead of 90 psychological level.

Retail sales in Australia rose more than expected by 0.5% mom in May. RBA left rates unchanged yesterday and adopted a wait-and-see stance. There are still some expectation for RBA to cut rates by as much as 75bps over the next 12 months. But opinion on the timing is diverged as some expect as soon as August. A more important piece of data will be next week's Employment data.

We expect the ECB to cut the main refinancing rate by -25 bps to 0.75% and the deposit rate by -15 bps to 0.1% at the July meeting on Thursday. President Draghi admitted the economic outlook has been deteriorating and accompanying with "serious" downside risks. Yet, further unconventional measures will not be announced at this meeting. While the sovereign debt crisis in the bloc has remained a fundamental problem, it is officially the responsibility of the national governments to find resolutions, instead of the central bank. More in ECB To Cut Policy Rate To 0.75%, No Further Unconventional Measures.

Additional asset purchases of 50B pounds in the July BOE meeting on Thursday have been priced in the GBP. Indeed, Governor Mervyn King has hinted since the last meeting that further easing would be adopted to boost the economy. In June, MPC members voted 5-4 to maintain the asset purchases unchanged. Those voted against additional easing would like to gauge the impact of the emerging "Funding for Lending," i.e. the Long Term Repo Operation (LTRO). It did not mean they were against increasing stimulus ultimately. Rather most of them expected to ease further in due course. More in BOE To Raise Asset Purchase Size To 375B Pound, 25% Of GDP.