GBP continues to weaken versus EUR and USD
The UK retail sales unexpectedly fell in April dragged down by the largest drop in food sales for nearly two years as retailers reported bad weather dented demand. The volume of sales (excluding fuel) declined by 1.4% from March. The minutes of the BoE May meeting showed the committee remained in limbo with a unanimous vote to retain Bank Rate at 0.5% and a continuation of the 6-3 voting split to maintain QE at £375bn. As it was offered no support, GBP continued to weaken on the back Tuesdays better than expected inflation data.
In testimony to the Joint Economic Committee yesterday, Fed Chairman Ben Bernanke hinted that the first reduction in QE bond purchases could occur as early as September. The minutes of the May FOMC meeting published later in the evening corroborated this possibility.
However, a reduction in the rate of bond buying does not mean that QE is ending. Instead, the Fed might cut its monthly asset purchases to around $55bn (from $85bn currently) but maintain the reduced pace well into 2014. Fed members stressed that the “pace and ultimate size” of asset purchases will depend on the outlook for the labour market and inflation.
The latest Fed comments have been broadly US dollar positive with EUR/USD breaking back below the $1.29 level. Similarly, GBP/USD weakened overnight and is down over one cent from yesterday testing the $1.50 support level early this morning.