Strong retail sales lift Sterling further, Dollar steady after hawkish Fed
20/May/2016 • Currency Updates•
Sterling continued to strengthen yesterday morning, rallying sharply to its strongest position against the Euro in three and a half months following the release of an impressive set of retail sales figures.
Defying colder than usual March weather, UK retail sales figures increased by 4.3% in the year to April, far exceeding even the most optimistic of forecasts. This sent the Pound to its strongest position in trade-weighted terms since early February following a remarkable spike in the UK currency on Wednesday after the release of the latest referendum polls which showed a heavy bias towards the vote to remain.
The US Dollar steadied at around its highest level against a basket of currencies since March following Wednesday evening’s very hawkish monetary policy meeting minutes from the Federal Reserve.
Rate-setter William Dudley reiterated yesterday that next month’s Federal Open Market Committee meeting remains ‘live’, saying he was surprised that the markets were not pricing in a higher chance of a hike.
Investors have begun busily repricing expectations for the next rate hike in the US in the past couple of days. Financial markets now suggest around a 32% chance that rates could go up again in June. As recently as two weeks ago the same measure was as low as just 2%.
Meanwhile, yesterday’s ECB meeting accounts were mostly a non-event as far as the Euro was concerned, with the single currency ending the day more or less unmoved against the US Dollar.
Trading today should be relatively quiet in the currency markets, with no significant data releases among the major economic regions. Investors instead remain heavily focused on both expectations for the next interest rate hike in the US and the latest opinion polls in the UK ahead of next month’s EU referendum.
Major currencies in detail:
Despite rallying to a three-month high in trade-weighted terms following Thursday’s strong retail sales figures, Sterling ended a modest 0.2% higher against the US Dollar yesterday.
The strong rebound in retail sales yesterday was a welcome surprise for the UK economy, particularly after the sluggish earnings and inflation data earlier in the week. Sales increased by 1.3% in the month, well above the 0.5% increase anticipated.
Encouragingly, the previous data for March was also revised upwards, despite cold weather in March denting spending.
Robust levels of domestic demand will be good news to the more hawkish members of the Bank of England, which we still expect to hike at some point in the final quarter of the year.
The Confederation of British Industry’s Industrial Trends survey this morning will unlikely shift the Pound, with investors seemingly fixated on next month’s referendum.
The Euro was range-bound for much of London trading yesterday, depreciating marginally by 0.1% versus the US Dollar.
There were no significant announcements from the ECB yesterday. Policymakers acknowledged growth had moderated, with risks tilted to the downside. They also highlighted worrisomely low inflation expectations that had failed to rebound with the recent increase in oil prices.
Earlier, construction output in the Eurozone slowed in March in another sign that growth in the Euro-area economy could be faltering. Output in the sector fell by 0.5% in the year.
There are no major economic announcements scheduled for release in the Eurozone today. Current account data this morning is unlikely to be a significant market mover.
The Dollar was mostly steady on Thursday, having rallied sharply on Wednesday evening following the release of the Fed’s April meeting minutes.
New York Fed President Dudley joined the growing list of FOMC members voicing support for a sooner-than-expected rate hike in the US yesterday. He acknowledged the risks posed to the US from a Brexit, although claimed he expected second-quarter growth to rebound following the disappointing start to the year.
On the data front, initial jobless claims rebounded strongly last week, again remaining well below the threshold 300,000 level. Claims fell by 16,000 to 278,000. The Philly Fed survey was, however, a massive disappointment, falling to -1.8.
Existing home sales this afternoon are expected to slow, although investors remain heavily focused on communications from Fed officials ahead of next month’s meeting.
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