Pound May Extend Drop on Claims Data, US Dollar Focused on Fed Outlook

The British Pound may fall further if soft Jobless Claims data erodes BOE policy expectations. The US Dollar is focused on Fed rate hike timing bets.

Talking Points:

• Pound May Extend Drop if Soft Jobless Claims Data Undercuts BOE Outlook

• US Dollar Looks to Retail Sales, PPI and Beige Book for Fed Rate Hike Bets

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UK Jobless Claims numbers headline the economic calendar in European trading hours. A 35k drop is expected, marking the smallest drawdown in four months. UK news-flow has increasingly underperformed relative to consensus forecasts since mid-September (according to data from Citigroup). Meanwhile, leading surveys suggest the pace of improvement in the labor market has markedly slowed compared with the first half of the year. Collectively, this opens the door for a downside surprise that may further erode BOE rate hike expectations and compound pressure on the British Pound. We remain short GBPUSD.

Later in the day, the spotlight turns to US event risk, where September’s Retail Sales and PPI figures are on tap. Receipts are expected to fall 0.1 percent compared with the prior month, while wholesale inflation is seen holding steady at a year-on-year rate of 1.8 percent. Separately, the Federal Reserve will publish its Beige Book survey of regional economic conditions.

Realized US economic data outcomes have cautiously improved relative to expectations over recent weeks. More of the same this time around coupled with an absence of particularly negative surprises in the Beige Book may reboot Fed rate hike bets, sending the US Dollar higher. Risk-geared currencies like the Australian and New Zealand Dollars may suffer most in such a scenario as the prospect of stimulus withdrawal amplifies already building global slowdown worries.

The Aussie recovered from overnight lows after September’s Chinese CPI data registered softer than economists expected. The benchmark year-on-year inflation rate slowed to 1.6 percent, coming in below forecasts calling for a 1.7 percent result and marking the weakest price growth in close to five years. A soft CPI print that potentially paves the way for an expansion of Chinese stimulus efforts as growth decelerates. That would bode well for Australian exporters, who count on China as their top customer.