UK retail sales figures surprise to the upside as US Philadelphia Fed figures unexpectedly drop

Tom Tong17/Aug/2012Currency Updates

GBP

Sterling rose to its highest in more than two weeks against the dollar on Thursday after UK retail sales unexpectedly grew in July by 0.3%, raising the prospect that the economy may not be as weak as previously thought. It also revised June’s monthly sales increase up to 0.8% from 0.1%, sparking analysts to now believe that initial estimates that the economy shrank by 0.7% in the April-to-June quarter are overly pessimistic. Stronger rises in factory output and the construction sector, together with continued falls in unemployment, could mean national income as measured by gross domestic product (GDP) is not shrinking as quickly as first estimated.

The good news continued as the unemployment rate fell to 8.0%, down from 8.2% in the previous quarter. The affects of this where bolstered after the dollar lost ground following the release of soft U.S. data. However there are two sides to every story as, despite sterling’s recent rise, investors are wary of buying it in a big way given recent manufacturing and services sector data, which has suggested the UK economy remains mired in recession after contracting for three consecutive quarters up until the end of June; this may prompt the BoE to ease policy later this year.

EUR

The euro had a remarkably good day yesterday on the back of week data from the US as well as a statement from German Chancellor Angela Merkel Speaking at a press conference on Thursday night, who expressed her support for ECB’s moves to save the eurozone. She backed President Mario Draghi’s calls for doing “whatever it takes to preserve the euro,” and said that ECB’s stance is completely in line with the vision of European leaders.

However deeper problem lie as the major issue on the horizon for the eurozone is the potential for both Italy and Spain to ask for monetary support – a move which could force the ECB to step in further, along with the possibility of Finland leaving the eurozone.

Talk is cheap and the need for Spain and Italy to ask for EFSF/ESM intervention for the ECB to deploy its balance sheet remains an issue that could well lead to increased financial market stress in the coming weeks. Short-dated Italian and Spanish bond yields rose slightly at the start of the week following auctions by the two nations. The yield on two-year bonds rose for both countries, while the yield on 10-year Italian bonds also rose by three basis points.

USD

The US dollar hit a fresh one-month high against the Japanese yen, that being said, the dollar did take losses against some of its higher yielding currency rivals during afternoon trading, losing strength against the euro and sterling as week data came out of the US, inparticular the Philly Fed Manufacturing Index which fell to -0.7% from an already weak -0.4%.

As markets get ready to close for the weekend, traders will want to pay attention to US Prelim Consumer Sentiment figure If the news signals additional improvements in the US economy, the dollar could see further upward movement against the yen.

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Written by Tom Tong

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