Dollar stronger into final reading of US GDP

• Pound unable to capitalise on shoppers

• Dollar helped by oil and jobs.

• Cameron bests Miliband, pound shrugs

• Japanese inflation back to 0%

Yesterday’s markets were a microcosm of the past weeks in that following an initial weakening, the USD ended the day very much on the front foot. Both euro and sterling, alongside the dollars of New Zealand, Australia and Canada, had the greenback on the run through the European morning but were promptly slapped back through the afternoon. It is tough work breaking this dollar rally and no currency has been able to do so quite yet. Momentum signals suggest that we are in for another period of USD strength as we begin the 2nd quarter.

Pound unable to capitalise on shoppers

Sterling strength did return, albeit briefly, to markets yesterday courtesy of February’s retail sales announcement. Sales volumes were 0.7% higher in February than the month previous as shoppers took advantage of lower energy and food prices. It seems that the good effects of deflation are being seen more widely than the bad i.e. consumers are using the windfall to their advantage as opposed to banking the extra cash and delaying their purchases.

Within the wider economy these figures are harder to become happy about. The rebalancing of the UK economy away from consumption more towards one of manufacturing and production, however incremental, does not seem to be taking place. We must also have concerns about margins within retail as consumers will quickly become used to these lower prices and stores will have a difficult time reacting to any upcoming inflation in a way that protects profit margins without scaring off shoppers. This will be especially true if the wage picture has not improved.

Cameron bests Miliband, pound shrugs

In six weeks’ time I will be sat at my desk having pulled an all-nighter to cover the impact of the General Election on the pound. Let’s hope there is more to it than the first of the leaders ‘debates’ that took place yesterday. An instant poll put together by Guardian/ICM showed the public believed Cameron had the better of the back-to-back questioning by 54% to 46%. The next debate takes place next Thursday and features Cameron and Miliband as well as Nick Clegg, Nigel Farage, Natalie Bennett of the Greens, the SNP’s Nicola Sturgeon and Plaid Cyrmu’s Leanne Wood.

Dollar helped by oil and jobs.

The rally of the dollar was initially started by a strong jobless claims number yesterday showing only 282,000 new people applied for unemployment insurance in the US last week, way below the average of 370,000 through the past five years. The violence in Yemen and supposed planning of ground assaults by Saudi and Egyptian forces put crude oil up around 5% on the session, strengthening the attraction of the USD and JPY as haven assets. As we said yesterday, today’s GDP announcement could trip up the USD in the short term.

Some of this weakness is likely as a result of the inclement weather that the Eastern seaboard of the US has had to deal with since the turn of the year, while there is also the chance that the strength and resilience of the US dollar will ensure that exports continue to contribute negatively to the US economy.

The final reading of US GDP for Q4 is due at 12.30 GMT and is expected to post an annualised gain of 2.4%.

Japanese inflation back to 0%

Has Abenomics failed? The Japanese government and central bank’s three-pronged attack to create inflation and stimulate demand seems to be flagging. While CPI rose 2% in April, once last year’s increase in sales tax is subtracted out, the figure becomes a big, fat zero. It seems that households are still struggling to adjust to the increased taxes despite improvements in jobs and wages.

Japan is suffering from a common disease at the moment in that the falls in commodity prices have knackered inflation targets. Unfortunately inflation readings without energy and food prices also remain poor and so we have to think that a further weakening of the yen via increased asset purchases or negative interest rates in Japan is likely.

Have a great day, a better weekend and don’t forget to change the clocks.