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Focus Turns To Retail Sales Data After UK Inflation Prints Weaker Than Expected

By Alex Edwards

The pound continued its downward trajectory yesterday, hitting a fresh 2018 low. CPI (inflation) data released on Wednesday morning was the initial catalyst, coming in slightly below expectations at 2.4% for the year. This reading – the lowest in more than a year - only serves to extend doubts that the Bank of England will hike interest rates in August.

The Pound found little support from the news headlines yesterday too, with reports that Theresa May’s government has yet to decide on the post-EU customs options it wants. Both Boris Johnston and Jacob Rees-Mogg have been vocal in their wish to leave the customs union quickly and for May to show more “backbone”. Again, Brexit continues to weigh on sterling and the incumbent government.

Focus this morning turns to UK Retail Sales - we’ll need to see a convincing beat for GBP/USD to bounce back. BoE Governor Carney is speaking at two events today too and traders will be listening closely for any hints towards an August rate hike. In the meantime the pound has been a bit better bid this morning on the back of a Times article stating that the PM will ask the EU for a new Brexit transition period until 2023. Markets seem to like the idea of delaying this thing.

It’s a fairly similar story for the dollar this morning – it remains generally strong despite a post Fed minutes wobble. The minutes, released overnight, revealed the Fed seem optimistic about the economy with the labour market continuing to strengthen and economic activity rising at a moderate rate. FOMC officials said that the economic outlook warranted another interest-rate hike “soon” with markets already pricing in a 90% rate hike in June.

US stock indices closed the Wednesday session higher, the tech heavy Nasdaq was up by 0.64%, the S&P 500 Index gained 0.32% and the Dow Jones Industrial Average rose 0.21%. We also saw US treasury yields fall, which were pulled down further after the Fed suggested it was willing to allow inflation to temporarily push above the target inflation rate of 2% without incurring an additional intervention from the Fed.

Risk sentiment is also playing its part with an ongoing war of words between the US and China on trade; Trump suggested a new auto tariff according to a report in the WSJ. The US/North Korea meeting in June is looking less and less likely too following various official comments and as such markets are trading in a relatively risk off fashion right now.

The Euro made fresh 6 month lows through trade on Wednesday as data showed the Euro area continues to suffer softness across broader macroeconomic indicators. Manufacturing and service sector business conditions in particular softened through the month to date, compounding slowdowns across other key economic markers and exacerbating expectations that monetary policy will remain accommodative well into 2019.

The Euro broke below the 1.17 handle to touch 1.1679 as the ongoing uncertainties that surround the Italian election and collation formation continue to weigh on the currency too. Concerns the new government will push for ECB debt forgiveness as well as some proposed fiscal policies will put pressure an already stretched fiscal deficit.

ECB monetary policy meeting minutes are released later today and will be the major focus for euro traders. You can only think the central bank will be dovish, so anything less dovish than expected could well be supportive of the single currency, especially in light of its recent and aggressive sell off.

Having touched intraday lows at 0.7523 the AUD found support yesterday afternoon as investors were reluctant to extend the sell-off ahead of the FOMC meeting minutes. While the minutes were largely on point and a June rate hike is firmly on the table, the aussie found short term support in key commentary that suggests 2 rate hikes in H2 are unlikely and that a gradual rate of adjustment is appropriate. The FOMC made clear there was no urgency to hike more aggressively and that if inflation moves moderately beyond the 2% target, it would be tolerated.

The commodity currency has also been subject to swings in risk appetite over the last 12-24 hours, caused in part from various Trump comments on trade with China and the ongoing threats by North Korea to cancel a meeting between the two countries.

The CAD firmed up a little vs. the USD later yesterday in response to the FOMC Minutes. Further movements in the Loonie will be contingent on NAFTA trade talks which continue to stall on US Auto demands, as informal deadlines were not met last week.

NZD/USD has retraced following the FOMC Minutes last night, this after losing quite a lot of ground after comments made by various members of the RBNZ. NZ trade data, released overnight, helped support this retracement in the kiwi. NZD/USD has pushed back above the .69 figure and opens this morning at .6915.