Better than expected retail sales from the UK lead sterling to a two-month high against the USD

Tom Tong16/Aug/2013Currency Updates

GBP

Sterling hit a two-month high against the Dollar on Thursday after UK retail sales beat forecasts of 0.6%, rising to 1.1%. This continuing trend of positive data being released from the UK, with a rise in house prices, a jump in services activity and a brighter report from the job market. This is cementing doubts as to whether the Forward Guidance policy outlined by the BoE is applicable to the changing state of the UK economy. The intention is to maintain interest rates at record lows of 0.5 until 2016 until jobless rates fall to 7%.

Combined with the release of the BoE’s minutes, which showed an unexpected division amongst policy makers about the details of the guidance plan itself. Investors have been pricing an increased probability of rates rising from their current historic lows as early as summer 2015.

However, part of Sterling’s rise against the Dollar has been supported by some weaker than expected data being released from the US recently. As the US gets back on track, we should expect to see a return to equilibrium for Cable.

There are no major data releases in the UK today.

USD

Recent data released from the US has muddied the picture of the strength of the US economic recovery. The dollar has slid more than 4% against a basket of major currencies between 9th July and 8th August.

However, the sharp drop in initial US weekly claims for jobless benefits to five year lows, and in-line inflation figures, supports the view that the Fed will begin shifting its policy stance sooner rather than later. The Dollar was back on a winning path and, with the exception of the pound, surged to fresh highs across the board. Higher US yields is raising the attractiveness of dollar-denominated assets. The general consensus is that Ben Bernanke will begin by tapering monthly purchases by $10 billion to a $75 billion pace.

However, remarks made by the president of the St. Louis Fed, James Bullard, on Wednesday added to uncertainty over tapering, with his more hawkish tone curbing bullish market enthusiasm.

The most significant data release from the US today is the Reuters/University of Michigan Consumer Sentiment Index, a survey of personal consumer confidence in the US economy. It is predicted to show an increase from 85.1 to 85.5. A report from the Commerce Department due today is forecast to show housing starts climbed in July to a 900,000 annualized rate from an 836,000 pace in June. In a sign construction will keep advancing, building permits are projected to increase to a 945,000 rate from 918,000 the previous month.

EUR

Following news that the Euro zone has emerged from its marathon 18 month recession, markets reacted positively yesterday with the common currency strengthening in value to both the pound and Greenback. A public holiday across the zone meant a relatively quiet day with no key data releases.

Factors encouraging growth include a buoyant tourism season following a particularly challenging winter. The ECB’s near-zero interest rates and generous provision of liquidity have helped spur progression in key euro countries. Europe however is far behind the US in repaying its public sector debts and unemployment remains high, and as such the feeling of recession will remain in the area. European businesses have the capacity to meet raising demand without hiring new workers or investing in machinery and thus productivity will rise before employment does.

There are no significant data releases from the Euro zone today.

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Written by Tom Tong

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