GBP remains weak despite positive data
UK retail sales, surprised to the upside yesterday with a strong increase of 1.2% in April, against expectations of a 0.9% increase. This was the strongest increase in over a year, however, this is being put down to the recent warm weather, late timing of Easter and the Royal Wedding. In the immediate after math of the announcement Sterling strengthened against the Euro before dropping back.
The reasons for this Sterling weakness, may be that the less volatile 3 month figure showed that retail Sales are still effectively flat for this year, the worry, that the Royal wedding may still have a negative impact on other data releases such as industrial production, and, finally Sterling’s inability to gain ground despite positive data, suggests, that there is currently negative sentiment towards the currency.
The Philly Fed gauge of manufacturing released in the US yesterday showed that the index has dropped 40 points over the past two months, suggesting, that the recent momentum in manufacturing has started to slow. However, the initial jobless claims reading fell for the third week in a row suggesting that there may be a slight recovery underway in the Labour market.
In Europe this morning, German producer price data increased pressure on the ECB to raise interest rates as prices rose 1% against expectations of 0.6%, which has led to Euro strength. However, the Greek debt situation remains unresolved, and, the ECB seems to be hardening its stance, with Trichet announcing, that Greek bonds can no longer be used as collateral if there was a restructuring; this could lead to serious liquidity problems for the Greek banking system.
Going forward, Sterling appears to be weak at the moment despite the high inflation and strong retail sales seen this week, and, it may take weakness in other currencies for this pattern to be reversed. In this respect, the Euro still has a black cloud, lingering on the horizon in the shape of Greece, and some sort of direction is needed on how this problem will be resolved.