Sterling remains on the rack

• Sterling driven lower by widespread selling as confidence dies

• French GDP increases by 0.3% in Q3 beating expectations

• Italian and Eurozone growth due, shouldn't change ECB policy outlook

• US retail sales expected to rise by 0.1% in slow October

Good morning,

To say that the price action in FX markets since the Bank of England’s Quarterly Inflation Report yesterday has been dull would be an understatement. The deafening howls of boredom from the market have only been drowned out by the snores of the traders watching it.

Sterling remains in focus as much as any currency is at the moment following Carney’s comments on Wednesday. As we detailed in yesterday’s update, the Bank of England is unlikely to offer the pound much support into 2015 and that encouragement around GBP will only be found should the data support it. It is the typical data releases that we are looking to for help; inflation and wages. A Q4 rate hike didn’t happen because of the wage outlook; I have to think that a rise in Q1 will not occur due to the low inflation outlook. Q2 is politically dangerous with the general election in May, hence why there is an overall view of Q3/4. In the absence of this, sterling looks increasingly vulnerable.

Sterling weakness has continued versus the European single currency this morning following a better than expected GDP figure from France. We had expected stagnation from the Eurozone's second largest economy but a print of 0.3% was right at the high side of estimations.

German growth also come out stronger than had been expected, providing enough output to revise Q2's negative number into positive territory and eliminate the spectre of a technical recession. That being said, growth is only being seen at a 0.1% QOQ rate - basically stagnation - and should not change the policy stance of the European Central Bank.

It is therefore completely correct to say that these levels of growth are not conducive to a re-inflationary atmosphere. Indeed, while a recession may be a harbinger of deflation in the Eurozone, there is nothing to suggest that these splodges of growth are in anyway tied to a new push of higher prices. Trade flows within and into the Eurozone economy are not strong enough to hold off disinflationary pressures. Mario Draghi and his team at the European Central Bank will be viewing the figures without too much celebration.

Figures from Italy and the Eurozone collectively are both due throughout the session and, should they take their cues from the French, will be dragging the single currency higher with it.

The real highlight of this shortened week from the US was always going to be today’s retail sales figures. October’s non-manufacturing ISM, published last week, continued the falls back from the highs seen in August and we would expect a similar drag to occur on Friday’s figure.

The propensity for consumers to save money between the end of the summer with the back-to-school rush and the run into Christmas typically leaves October as a strange month for retailing. As we have stated before however, the falls in energy prices have an obvious effect on disposable income levels and with the oil price continuing lower there will have been more cash in back pockets. We are looking for a 0.1% increase on the month.

Have a great day.