Solid US retail sales boosts chance of September rate hike
14/Aug/2015 • Currency Updates•
The Pound ended the London trading session 0.1% lower against the US Dollar yesterday following impressive retail sales figures across the pond.
With little in the way of economic data out in the UK economy yesterday, much attention was on external factors elsewhere. Markets reacted to the release of figures overnight from the Royal Institution of Chartered Surveyors who announced their latest monthly house price balance. The index increased from +40 in June to +44 last month, representing the largest increase in house prices in a year. The report also suggested that a shortage of homes was likely to push prices even higher over the next twelve months. An acceleration in house price growth, combined with a relatively flat trend in sales activity, is likely to present a major challenge to the UK housing market in the near future.
Meanwhile, the latest poll from Reuters showed the general consensus among economists that the Bank of England will hike rates in Q1 2016, despite recent events in China, as is our long standing forecast.
A late rally from the Euro yesterday allowed the single currency to end higher versus both the Pound (+0.3%) and the Dollar (+0.2%), despite spending most of the day lower.
The main event of the yesterday was the release of the ECB’s monetary policy meeting accounts, although this in the end had little market impact. The Governing Body claimed that Chinese market volatility and an interest rate increase in the US may slow the recovery in the Euro-area. According to the minutes, GDP growth disappointingly remains moderate and gradual, with the economy remaining near 2008 levels, while the US has rebounded significantly. Financial developments in China have had a “larger-than-expected adverse impact”, although the central bank appears comfortable that its QE programme was having the desired effect on the Eurozone’s medium term inflation outlook.
In other news, growth figures for Greece eclipsed even the most optimistic of forecasts. The economy expanded by an annualised 1.4% in the second quarter, well above the 0.8% contraction that was expected.
Inflation figures for July will be in focus this morning in the Eurozone. This will coincide with the highly anticipated announcement of second quarter growth figures, with the Eurozone economy expected to have only expanded by a modest 0.4% in the three months to June.
The US Dollar was given a boost yesterday, fuelled by encouraging retail sales figures that bolstered expectations the Federal Reserve would be increasing its interest rate in September.
Yesterday’s upbeat report from the Commerce Department showed that retail sales for July increased by 0.6%, moderately higher than expectations. Moreover, the figure for June was revised upwards from -0.3% to static. Last month’s robust number was driven higher by demand for clothes and cars and came despite core retail sales, which excludes autos, slightly falling short of forecasts, increasing by 0.4%. Nonetheless, the solid headline retail sales figure, as well as recent impressive import, factory inventories and construction spending data, points to a possible upward revision in the second quarter growth figure closer to the 3% mark.
Elsewhere, the weekly jobless claims unexpectedly increased last week. However, more critically, the four week moving average of claims decreased by 1,750 to 266,250, its lowest level since April 2000. This provides another clear signal that the labour market in the US is continuing to tighten.
Attention among traders in the US today will be on the release of industrial production figures from Federal Reserve at 2.15pm BST. Other second-tier announcements including the producer price index and capacity utilisation may also cause additional Dollar volatility.
Rest of the world
Higher than expected inflation figures in Sweden caused the third largest Krona rally so far this year. The Turkish Lira plunged to a fresh record low after talks to form a coalition following June’s hung parliament result failed yesterday, edging the country towards a snap election.
Meanwhile, the People’s Bank of China calmed markets concerned over a sustained CNY devaluation, saying it has stopped regularly intervening in the FX markets. This follows three devaluations by the central bank in three consecutive days.