Retail sales boost GBP

Yesterday, the markets witnessed one of the strongest days the pound has seen this year, as it appreciated against all of its major counterparts, mainly due to the positive retail sales figures that were published in the morning. Retail sales increased by 1.2% in the month of April against the forecast levels of 0.4% as the British general public took advantage of the first fall in consumer prices for five decades, in a market where unemployment is at its lowest for 7 years. And despite inflation dropping to the low of -0.1%, this has done little to affect the fortunes of the pound as evidently consumers are not waiting to see if prices drop further, locking themselves in a ‘carpe diem’ spending blitz. Bank of England Governor, Mark Carney, alluded to the fact that the drop was temporary, pointing to a drop in fuel and food prices, which have largely been driven by other mitigating factors, as to the negative inflation figure. Subsequently, the pound broke the key psychological level of 1.40 interbank (IB) against the euro, pushing a daily high of 1.4099 (IB) and had similar fortunes against the dollar where it regained losses sustained overnight, touching the daily high of 1.5699 (IB). Further substantial gains were made against the Aussie (AUD) and Kiwi (NZD), the pound seeing an uplift of 0.76% and 0.62% respectively. Moves seen yesterday by the pound and the euro fall in line with expectations that have been printed for some time. The consensus view is for a weaker euro, pushing to the forecast levels of 1.41/42 over the rest of the year, so certainly this could be viewed as a big leap towards that. The dollar levels suggest a slightly bloated Sterling level, with forecasts set at 1.45/43 towards Q3/4 of 2015, so further movement is expected here. Public Sector Net Borrowing data is released at 09:30 this morning, which will be followed by Mark Carney addressing an ECB forum in Portugal, which will no doubt add to the movement.

Manufacturing and Services Flash PMI data was released by all the major European nations yesterday. French manufacturing ticked up against forecasts which helped the eventual print of European manufacturing data to reach a positive number. However, across the board services disappointed, particularly from Germany, which printed 52.9 against the forecast 53.9, resulting in the eventual European number also printing down. This did little to help the single currency which seems to be gradually feeling the force of its stronger peers once again. The rally that had seen the euro appreciate so aggressively over the last 3 weeks is now looking to have come to an abrupt end as the single currency lost some 140 points against the pound over the London session. The ECB is expected to accelerate their QE program over the next six weeks in order to counter balance what they feel will be quieter months in July and August and, with big question marks still lingering over the Greek situation, further euro declines are a real and definite possibility. Greece has their largest payment to make to the IMF on 12 June, being €3.6Bn, which is increasingly looking more challenging, with many Greeks surely looking for something more like a miracle rather than extra bailout funds. Finance Minister, Yanis Varoufakis, has already stated he feels this could be a bridge too far and as such could be the catalyst that pushes euro rates closer to the forecast levels. German Ifo Business Climate data is the highlight today, published at 09.00 and expected to marginally decline to 108.3 down from last month’s 108.6. ECB President, Mario Draghi, addresses the same conference as Mark Carney, so again expect movement on the back of this.

The run of average to poor US data seemed to continue yesterday as the US published Unemployment Claims data, Existing Home Sales data and Philly Fed Manufacturing data which all printed down against the forecasts. FOMC Minutes published on Wednesday night alluded to the fact that the Fed believe that US data will improve over the coming months, sighting ‘transitory factors’ including poor weather as the reason for bad numbers from Q1 of 2015. Additionally, the much anticipated interest rate rise is looking more likely towards the third quarter of the year, despite some Fed members calling for a rise as early as June. However, despite the positive tone of the Fed, their sentiment is still proving difficult to swallow as the run of poor data continues. The dollar lost key ground against the pound yesterday, which can mainly be attributed to pound strength. However, whilst the euro seems to be showing signs of weakness, the dollar is yet to capitalise, closing the London session at 1.1125 (IB), still above the psychological 1.10 (IB) level. The market will want to see something more positive in terms of data over the coming weeks if the levels that have been forecast are to come to fruition. The opportunity for the dollar to strengthen against its peers is there, it is now a case of that coming to reality. CPI m/m inflation data, both core and non-core is the only release Stateside today. The expectations are of this component to tick down from the previous month, which will surely put the dollar under more pressure. After which, Fed Chair, Janet Yellen is due to speak at the Greater Providence Chamber of Commerce – eyes and ears will be on any clues to future policy.