Sterling
The Pound softened slightly versus the majors on Friday morning as investors reacted to disappointing UK retail sales data.
In a further sign that rising price pressures are starting to weigh on consumer spending habits, March’s retail sales index fell by -1.5%. On an annual basis sales volumes decelerated from 4.1% to 2.6% and on a quarterly basis the index fell 1.4%, the fastest rate for seven years. Traders fear that price rises, as a consequence of the Pound’s sharp Brexit depreciation, could drag on economic growth over the next few years – especially considering that wage growth appears to have hit a roadblock. Former Bank of England policymaker Andrew Sentence said the quarterly drop in retail sales marked the beginning of the Brexit slowdown that was predicted prior to last June’s referendum.
However, negative Sterling sentiment was cooled by hawkish remarks from serving BoE rate-setter Michael Saunders, who hinted he was preparing to vote for higher interest rates. Saunders noted that ‘a modest rise in rates would still imply that considerable stimulus remains in place’. He also argued that the bank was not ‘necessarily obliged to delay any policy moves until we have certainty over the exact shape of Brexit and its long-run effects’. Although a UK rate hike still looks a while off, we could see interest rate bets accelerate and demand for the Pound increase if other policymakers voice similarly hawkish opinions.
Euro
The Euro jumped by around 150 pips when markets reopened this week as traders bought back into the single currency in reaction to the first round of the French Presidential elections.
Centrist Emmanuel Macron and far-right Marine Le Pen made it to the second round and analysts believe Macron will easily beat Le Pen in the next vote. The Euro had come under pressure prior to the first round of votes on fears that anti-EU candidates Marine Le Pen and Jean-Luc Melenchon would progress. So, although Le Pen’s candidacy is still alive, there appears to be significantly less risk of Europe’s second-largest economy leaving the European Union.
The Pound to Euro exchange rate had traded close to 2017 highs on Friday’s session as election jitters outweighed the underwhelming UK retail sales report. Data out of the Eurozone showed an encouraging rise in private sector output, with the composite index rising unexpectedly from 56.4 to a six-year high of 56.7. The upbeat report lent the single currency a leg-up but traders were reluctant to buy into the Euro with too much zeal ahead of the French election first round results.
US Dollar
The Pound to US Dollar exchange rate ticked higher by around a quarter of a cent on Friday as GBP/USD’s upward momentum remained intact.
Sterling smashed its way through a couple of significant resistance barriers last week on the news of the snap UK elections and technical analysts believe ‘Cable’ could strengthen further if the Pound manages to sustain its recent rally.
US data showed a surprise slowdown in manufacturing activity in April, with the PMI dipping from 53.3 to 52.8. And demand for the ‘Greenback’ was also impacted over the weekend by new threats from North Korea, which some feared could disrupt financial markets and prevent further interest rate hikes from the Federal Reserve. An article in the state-run North Korean press stated that the nation’s ‘revolutionary forces are combat-ready to sink a US nuclear-powered aircraft carrier with a single strike’, referring to a US ship that was sent to the western Pacific by US President Donald Trump.
Canadian Dollar
A sharper-than-anticipated dip in Canadian consumer prices allowed Sterling to strengthen by around half a cent on Friday, remaining close to its highest level since last September.
The Canadian inflation report for March showed that price pressures receded from 2.0% to 1.6%, missing market expectations of 1.8%. Falling food and clothing prices contributed to the underwhelming CPI print, which appears to corroborate Bank of Canada Governor Stephen Poloz view that there is enough slack in the economy to warrant a longer period of low interest rates.
Australian Dollar
Sterling tumbled by around 40 pips against the Australian Dollar on Friday as traders sold the UK currency on fears of a consumer slowdown. British retail sales plummeted in March and forecasters now expect UK GDP to have cooled from 0.7% to 0.4% in the first quarter of 2017. The fear is that flatlining wages and rising prices could continue to drag on economic output over the next few years.
New Zealand Dollar
The surprisingly steep dip in UK retail sales volumes helped the New Zealand Dollar recover by around a cent against the Pound on Friday. GBP/NZD had previously struck its highest peak since September of last year.
Data Released
09:00 EUR German IFO – Business Climate (APR) Medium 112.4