Retail sales figures boost US Dollar ahead of today’s Fed meeting
15/Jun/2016 • Currency Updates•
The US Dollar continued its recent recovery on Tuesday, rallying to its strongest position in 10 days following the release of a fairly encouraging set of retail sales figures.
This was welcome news following a raft of disappointing economic releases in the US which have all but eliminated the possibility of a second post-financial-crisis interest rate hike by the Federal Reserve at its meeting this evening.
We’re in line with the general market consensus and are not expecting any bombshells from the Fed tonight. It will likely reiterate that all subsequent meetings are ‘live’ in terms of the possibility of a hike.
The famous ‘dot plot’, summarising Fed members’ expectation of future policy moves, should, in our view, remain largely unchanged. We also think that the assessment of the state of the economy will be fairly noncommittal in order to keep the central bank’s options open to hike in July – and wait for the critical June payroll report to decide.
UK businesses seem solely focused on Brexit polls, with just over a week to go until Britain decides on its EU membership. Yesterday, the Pound took another hammering after a new poll indicated that the ‘leave’ side was strengthening and the referendum would be a lot tighter than originally anticipated. The TNS poll showed a seven point lead for ‘leave’ at 47% to 40%. This now means that seven of the past eight major polls have put the ‘remain’ camp behind.
Bookmakers’ implied probability for the vote to ‘leave’ yesterday edged above 40%, while our favoured measure, the Number Cruncher Probability score, now places around a 32% chance of a Brexit.
With Brexit uncertainties increasing day by day, investors are flocking into safe-haven currencies. The Japanese Yen and US Dollar are benefitting in particular. We’ve observed many UK-based international businesses protecting themselves against the significant downside risk should the ‘leave’ vote win on 23 June.
Major currencies in detail:
Sterling was sent 0.3% lower against the US Dollar yesterday as concerns of a Brexit next week continue to amplify.
UK inflation in May remained unrevised yesterday after economists had expected a slight increase in the figure. Consumer prices grew by 0.3% in the 12-month period, with the core measure increasing by 1.2%. According to the Office for National Statistics, a fall in the price of clothing in the UK was offset by rising transport costs.
Meanwhile, the same report showed that house prices rose by 8.2% in the past year, slightly slower than the 9% growth seen in April.
This morning’s labour report will draw some attention away from the EU referendum. Unemployment is expected to remain unchanged, with earnings set to suffer another modest slowdown.
Despite an impressive set of industrial production figures in the Eurozone, the Euro ended the London session 0.4% lower against the US Dollar.
Industrial production in the Euro-area rose by 2% in the year to April, much larger than the modest 0.2% increase recorded in March. The main reason for the greater-than-expected increase was a higher production of big-ticket items such as nondurable consumer goods.
This should provide some comfort for the Euro-area economy following a fairly encouraging start to the year and it’s suggesting that the ECB may be right in holding monetary policy steady for the next few months.
Eurozone trade figures this morning are the only major economic release in an otherwise quiet day in the Eurozone economy.
The US Dollar index rose 0.4% on Tuesday, with investors continuing to seek the safety of the Greenback amid concerns regarding the EU referendum.
Yesterday’s retail sales figures in the US provided a welcome boost to the world’s largest economy. Sales beat expectations, rising by 0.5% in the month to May. This suggests that US consumer spending, which accounts for around two thirds of overall production, is in a healthy state.
The core measure of retail sales, which excludes automobile sales, rose by 0.4%, in line with expectations. The Fed will no doubt be fairly encouraged by yesterday’s figures, although will wait until next month’s crucial labour report for a better indication as to the overall strength of the US economy.
The Fed will steal the limelight in the US today when it announces its interest rate decision and press conference from 19:00 UK time.
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