Strong retail sales data lifts Sterling to one month high

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24 March 2017

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Pound rose to its highest position against the US Dollar since late-February on Thursday after the release of a better-than-expected set of retail sales figures further ramped up speculation that the Bank of England could hike interest rates before the end of the year.

S
terling rose back above the 1.25 level versus the greenback after data showed sales at retail stores in the UK increased by an above forecast 3.7% in the year to February (Figure 1). The news somewhat eases concerns that UK consumer spending could be trending downwards following the sharp slowdown recorded in January.

Figure 1: UK Retail Sales (2013 – 2017)

BoE monetary policy committee member Ben Broadbent also stoked expectation that interest rates could be set to rise in the UK this year. Broadbent, one of the more neutral voting members on the committee, claimed that it was “quite possible” interest rates could go up, although declined to comment on whether he was himself close to dissenting. He also stated that the central bank’s own forecasts were conditional on a gentle increase in interest rates. Market pricing for a hike this year remains at around 40%, slightly too low in our view.

In the US, the Dollar clawed back some ground against its major peers, although remained around one month lows on concerns that Donald Trump would be unable to push through his fiscal spending plans this year. Investors were left disappointed by Janet Yellen’s appearance in Washington yesterday, where she failed to comment on monetary policy.

This morning we saw another set of very impressive business activity PMI’s out of the Eurozone. Both the manufacturing and services PMI’s came in well above forecast, with the composite index rising to a six year high 56.7. We think this could pressure the ECB to tightening monetary policy for the first time since 2011 later in the year

Major currencies in detail

GBP

Yesterday’s impressive retail sales figures helped lift the Pound 0.7% against the US Dollar on Thursday.

A spokesman for Theresa May confirmed that the triggering of Article 50 will still go ahead as planned next week, despite Wednesday afternoon’s terrorist attack in Westminster. The Pound has been on a very good streak in the past two weeks or so. However, with the UK government poised to begin EU exit talks and investors uncertain as to the effect the divorce talks will have on the UK economy, short term gains for Sterling could be limited.

With economic news very light on the ground in the UK today, investors will turn their attention to events elsewhere.

EUR

Amid a fairly light economic calendar, the Euro was range bound for most of the day against the US Dollar. The common currency did, however, rises this morning off the back of today’s impressive PMI data.

Confidence data out of the Eurozone yesterday suggested that consumers in the Euro-area were undeterred by the growing political uncertainty in the currency bloc in March. The consumer confidence index increased to -5.0 from -6.2, just shy of its highest level since before the financial crisis in 2007.

The ECB’s bulletin was also released yesterday. The central bank expects economic activity to remain firm, although failed to add any significant new information.

USD

The US Dollar rose 0.1% against its major peers on Thursday.

Jobless claims data out of the US last week came in surprisingly higher than forecast, bucking the recent trend of impressive labour market data out of the US economy. Initial claims for last week rose to 258,000 from a revised 243,000, although the more representative three week moving average of claims remained essentially unchanged.

Meanwhile, Federal Reserve member John Williams also spoke yesterday. Williams told the Wall Street Journal that three to four interest rate hikes in the US “made sense”.

A host of economic data in the US today could lead to a particularly volatile session of trading. Durable goods orders just after midday and the monthly services and manufacturing PMI’s from Markit could all prove to be market movers.