Headlines
UK retail sales on tap –
Decent 4.4% expansion predicted.
GBP/EUR sinks on Greek aid sign off –
Positive step for Eurozone stability.
GBP/USD rallies on Fed minutes –
Officials cautious of low inflation expectations.
Commodity bloc up on softer Fed hike bets –
Markets price-in December rate hike.
Sterling
It was an agreeable day for the Pound yesterday as demand remained sturdy following Tuesday’s surprise rise in inflation. And Sterling could put in another decent performance today if data shows, as expected, that British retail sales rose 4.4% year-on-year in July. Investors will be scouring upcoming UK ecostats for clues regarding the path of interest rates and the retail report certainly represents one of the more significant data prints because consumer spending accounts for over 70% of British economic output. If the sales data reflects the recent return to rising real wages and shows that Britons are displaying more proclivity to spend then bets of an early rate hike from the Bank of England could impel the Pound to more gains over the next few months.
Euro
The single currency emerged from the latest leg in the Eurozone debt crisis on the front foot yesterday as German politicians took to the conical glass roofed Bundestag to vote in favour of Greece’s latest aid package.
Although 113 officials voted against the €86 billion bailout deal (63 of whom belonged to Chancellor Angela Merkel’s conservative bloc) and 18 abstained the bill passed easily with 454 votes in favour. This paved the way for Greece’s European creditors to sign off the package, which boosted sentiment in the currency bloc and drove the Euro higher by around 80 pips against the Pound.
The single currency also drew support from the latest Fed minutes report, which did little to boost September rate hike expectations.
US Dollar
The Pound to US Dollar exchange rate once again failed to assert itself above key psychological resistance yesterday.
Markets tipped the ‘Greenback’ higher following data showing a 0.2% increase in US consumer prices during July but demand for the US Dollar decreased during the evening when the latest Federal Reserve minutes report was leaked around 20 minutes early. The central bank literature confirmed that policymakers felt the time for higher rates was ‘approaching’ but that officials were not yet convinced that inflation prospects were anchored inline with the bank’s 2.0% target rate.
Given that the report was not considered overly hawkish – and that it was put together before the shock 5% devaluation in the Chinese Yuan last week – it seems that markets are finally coming around to the idea that the Fed is more likely to delay its first rate hike until December than go ahead with the move in September. It is difficult to believe that the 0.2% domestic inflation print will be enough to overshadow the potentially massive deflationary move by the People’s Bank of China and subsequently there is scope for further Sterling gains if Fed officials opt to remark on the Chinese situation over the next few weeks.
Canadian Dollar
The Pound rallied by over 150 pips against the Canadian Dollar yesterday afternoon as the value of Canada’s most lucrative export – crude oil – plunged in response to a surprise rise in US crude stocks.
However, Sterling was forced to give up some of its earlier gains when the Fed minutes report was leaked because investors saw it as a sign that rates would probably remain at rock-bottom levels in the US until December.
Australian Dollar
We don’t know what traders were expecting but the latest Fed minutes report showed a sober attitude towards raising interest rates. The relatively neutral report was seen as a risk-on signal, given that it could mean that borrowing costs in the world’s largest economy remain low for longer. In response to the leaked report the Pound to Australian Dollar exchange rate declined by around 50 pips.
The New Zealand Dollar followed the rest of the commodity bloc higher against the Pound yesterday as Federal Reserve rate hike bets were pushed back following the uninspiring Fed minutes report. The ‘Kiwi’ registered a 75 pip gain against Sterling following the minutes’ early release during the New York Session.
D a ta Released Today
09:30 GBP Retail Sales Inc Auto Fuel (YoY) (JUL) Medium 4.4%
13:30 USD Initial Jobless Claims (AUG 15) Medium 272K
15:00 USD Leading Indicators (JUL) Medium 0.2%