Sterling under pressure ahead of Retail Sales

In what turned out to be a fairly choppy and disjointed session, markets in Europe finished the day higher, as did markets in the US, helped mainly by a rebound in the energy and basic resource sectors.

The publication on Wednesday of the latest Fed minutes didn’t add much to the overall understanding of whether the central bank was inclined to be more hawkish or dovish as we head towards the end of the year. Investors still appear to be trying to convince themselves that the US central bank will eventually be forced to pivot when it comes to the current trajectory of its interest rate policy.

We did get some further commentary from four Fed speakers about the likely direction of US monetary policy, notably from Mary Daly of the San Francisco Fed, Esther George of the Kansas City Fed, James Bullard of the St. Louis Fed and Neel Kashkari of the Minneapolis Fed.

All four of them were consistent with their messaging, with Bullard once again saying he expected to see a Fed Funds rate of 3.75% to 4% by year end, and that he is leaning toward a 75bps move next month. In a sense that does make sense given there are only three meetings left between now and the end of the year, which means that to achieve that rate, at least one meeting would need an outsized rate move.

It was Minneapolis Fed President Neel Kashkari’s comments that were most illuminating, given he had always tended to lean to the dovish side. He was insistent that the Fed needed to do more on inflation urgently, even if it meant slowing the economy to the point of risking a recession.

These remarks were particularly apparent with respect to the US dollar, which pushed up to its highest levels in a month, after the latest weekly jobless claims unexpectedly fell back from the previous week.     

The pound and euro also came under pressure yesterday, on the back of continued rising gas prices, with sterling falling below the 1.2000 level, in a worrying sign that further declines could be on the way, as more and more negativity starts to seep in with respect to the wider economic outlook.

With UK consumer confidence already at rock bottom, this morning’s August numbers won’t have inspired much, coming in at a new record low of -44, compared to -42 in July.  

Despite low consumer confidence, retail sales in June did come in better than expected, although it was clear that rising fuel prices were impacting consumers driving habits.

The consumer outlook continues to be challenging with consumer confidence at rock bottom, although there was a silver lining in the June retail sales numbers with a sharp rebound in food and drink sales of 3.1%, prompting 0.4% rise.

With fuel sales included the picture was a little starker, as these fell -4.3%, dragging the month-on-month number to -0.1%. The May numbers which had already been disappointing, were revised lower as well. So, what to expect for today’s July numbers with the start of the school holidays, and the extremely hot weather.

One of the more notable takeaways we saw from recent earnings numbers from Next was the resilience in clothing sales as the hot weather prompted consumers to spend money on summer clothing, as well as trying to remain cool.

The most recent BRC retail sales numbers appeared to confirm a pickup in spending with strong sales of clothing, food and drink and electric fans. Spending data from Barclaycard was also solid, rising 7.7% in July, which suggests we might see an upside surprise, although most forecasts are uniformly pessimistic, with an expectation of a -0.3% decline, excluding fuel sales.

The latest public sector borrowing numbers for July are expected to show a big fall in borrowing to £3.2bn from £22.9bn in June.

EUR/USD – Starting to drift lower, with the downside bias towards 0.9950 prevailing now we’ve moved below 1.0100. The 1.0220 area now becomes minor resistance, followed by major trend line resistance from the January highs at 1.0340.  

GBP/USD – Slipped below 1.2000 and the 1.1960 area, with a move below 1.1920 opening the prospect of a revisit of the lows at 1.1760. Not quite ready to throw in the towel on our possible inverse H&S formation with the neckline at 1.2270. A break through 1.2300 targets a move towards 1.2600.

EUR/GBP – Edging back higher again after rebounding from the 0.8380 area. Still have resistance just below the 0.8500 area, the bias remains for a retest of the 0.8340 area.   

USD/JPY – Remains in the cloud range but has now moved above the 50-day SMA, with resistance now at 136.30. Still have support at 132.80. Below 131.60 targets the 130.20 area.  

FTSE100 is expected to open 9 points higher at 7,550.

DAX is expected to open 52 points lower at 13,645.

CAC40 is expected to open 14 points lower at 6,543.