Headlines
• UK retail sales slow in October –
Sterling resilient as Rugby World Cup impact passes.
• GBP/EUR close to three-month high –
ECB minutes & chief economist speak of further stimulus.
• Sterling hits fortnightly high vs. US Dollar –
Investors worried by slow 2016 Fed hiking outlook.
• Canadian Dollar down ahead of data –
Retail sales and inflation reports on tap.
Sterling
Data yesterday showed that UK retail sales slumped -0.9% last month, which brought the annualised consumer spending index down from 5.7% to 3.0% in October. The figures were slightly lower than investors had hoped for but the Pound did not suffer any large losses after the release because a hangover from the Rugby World Cup in September was largely priced in.
In September retail sales surged 1.5% thanks to a mixture of rising real wages, cheap fuel prices and a spate of fierce supermarket price wars – plus the additional boost of England hosting the Rugby World Cup. But after this bumper month of sales a slight correction was inevitable, especially as consumers often begin saving in October for spending sprees over the Christmas period. Analysts noted that the unusually warm autumn weighed on clothing sales and this was also cited as a factor for the slightly steeper-than-expected -0.9% contraction in October.
Euro
The Pound to Euro exchange rate came within 2 pips of striking a fresh three-month high yesterday morning but demand for Sterling softened slightly following the lower-than-anticipated British retail sales numbers.
The single currency has been weakening in recent weeks ahead of December’s policy decision from the European Central Bank, which many investors believe will see President Mario Draghi unleash another dose of monetary loosening. The latest ECB minutes, released yesterday, showed that policymakers were concerned that the current stimulus programme was not ‘gaining sufficient traction…to achieve their ultimate objective in terms of inflation rates,’ and revealed that the central bank was ready to loosen policy further ‘sooner rather than later’.
And the dovish message from the minutes was echoed by the ECB’s chief economist Peter Praet who told reporters yesterday morning that the lower bound for interest rates ‘may be lower’ than previously thought. The Euro is projected to weaken further against the Pound as more details of the ECB’s potential new stimulus plan are released.
US Dollar
Surprisingly, Sterling rallied to a fortnightly high against the US Dollar yesterday afternoon. The ‘Greenback’ has underwhelmed since the release of the Federal Reserve’s latest minutes report on Wednesday evening even though the central bank statement was generally seen as indicative that policymakers are ready to raise rates for the first time in nine years in December. It seems that a Fed rate hike is already priced-into the value of the US Dollar, which means that the ‘Greenback’ could struggle to strengthen further if the Fed is not seen ready to raise rates multiple times through 2016.
However, the outlook for inflation in the US (core CPI of 1.9%) looks much better than over here in the UK (core CPI of 1.1%) and subsequently it is entirely likely that the Fed will maintain a hawkish policy path in the New Year.
Canadian Dollar
The Pound to Canadian Dollar exchange rate rallied by around 70 pips yesterday ahead of a potentially troubling set of Canadian ecostats due for release this afternoon.
The Canadian retail sales index is tipped to have slowed from 0.5% to 0.1% in September, which could hurt the ‘Loonie’, as could a soft CPI report. October’s Canadian inflation index is forecast to remain at 1.0% but with crude oil prices suffering further declines in recent months there is potential for a lower print. The risk-sensitive ‘Loonie’ could find itself depreciating if the CPI score comes in below 1.0%.
Australian Dollar
The Australian Dollar mounted a 130 pip rally against the Pound during yesterday’s session. At first the reason for the ‘Aussie’ Dollar’s rise to fame was difficult to understand but two theories grew to prominence: the first stated that markets were discouraged by the Fed minutes report, for its perceived dovishness with regards to the speed and frequency of rate hikes in 2016; the second stated that the Australian Dollar strengthened thanks to a classic case of ‘buy the rumour, sell the fact’ in which investors decided to lock-in profit after the Fed report was announced.
New Zealand Dollar
It was a similar story for Sterling against the New Zealand Dollar as it was against the Antipodean’s cousin, the ‘Aussie’, yesterday. GBP/NZD softened by around -150 pips as – most likely – traders cashed in on long Sterling positions following the Fed minutes report, which was seen to increase the chances of a rate hike in December.
Data Released Today
09:30 GBP PSNB ex Banking Groups (OCT) Medium 6.0b
13:30 CAD Retail Sales (MoM) (SEP) Medium 0.1%
13:30 CAD Consumer Price Index (YoY) (OCT) High 1.0%
15:00 EUR Euro-Zone Consumer Confidence (NOV A) Medium -7.5