Sterling back below 1.31
Friday’s decline in global equity markets meant a more cautious risk tone but the Pound performed relatively well. After defending the 1.3050 on the Dollar, Sterling steadily climbed to highs near 1.3140 against a weaker Dollar but the 4pm London fix heralded a retreat back below 1.3100. There was no such weakness in the Euro, which was supported near the 1.1111 mark before strengthening to 1.1050.
Futures market data recorded a decline in bets against Sterling, now the lowest short position since late April. Sterling will, therefore, find it difficult to gain further support from short covering in the short term (rapid buying to close positions). Rightmove reported that house prices rose by 4.6% in the year to August from 3.7% previously. The evidence seems to suggest “pent-up demand” after the market reopened as the prices declined less than usual in the month on seasonal grounds. The EU issued a warning that UK finance firms will have to wait longer to be approved for access to the EU market because the EU internal markets are in a state of regulatory flux. This morning Sterling is back below 1.3100 on the Dollar and the Euro above 1.1050.
US retail sales increased 1.2% for July, below consensus forecasts of 1.9% as car sales fell short of expectations. There was, however, an upward revision to the June figure to 8.4% from 7.5% and sales increased 2.7% over the year. Underlying sales increased by 1.9% for the month and the control group sales increased by 1.4%. The sales data overall offered some reassurance over the outlook, although retail sales only account for a limited proportion of overall consumer spending.
There was further uncertainty over the outlook given the complications of failure to deliver a further fiscal support package which could undermine confidence.
Industrial production increased by 3.0% for July, in line with consensus forecasts. The University of Michigan consumer confidence index increased marginally to 72.8 from 72.5 previously and slightly above market expectations. There was a slight decline in the current conditions index with a marginal gain in expectations.
Dallas Fed President Kaplan commented that the unemployment rate could still be 8-9% in 2021 while Minneapolis head Kashkari criticised the US lockdown for not being strict enough. The latest CFTC data recorded a further increase in long, non-commercial long positions to 200,000 contracts in the latest week. This positioning will leave the vulnerable at risk of a sharp interim correction even if medium-term underlying buying continues.
Further weakness in the Dollar is helping the Euro to advance towards the 1.19 area. Currently trading around the 1.1860 the common currency is now posting gains for the fourth consecutive session, managing to leave behind the 1.1800 kep psychological level as the selling pressure in the Greenback keeps building up.
The July-August rally, while largely triggered by broad based Dollar selling and improved sentiment, found extra momentum in more promising results from domestic fundamentals, which have been in turn supporting the view of a stronger economic recovery following the coronavirus crisis.