Sterling Pushes On Despite Fragile Sentiment
CBI retail sales index surprised with a sharp bounceback to 4 for July, up from -37 in June and significantly beating forecasts of -27. Surveyed retailers were cautious over the prospects for August with a reading of -5 and there was a further decline in orders which will maintain caution over the outlook, especially in the non-essential sector. A NIESR report forecasted GDP would contract by 10.1% for 2020 before expanding 6.1% in 2021, adding that unemployment would be near 10% by year-end. The report called for further support for the labour-market and criticised the move to close the furlough scheme at the end of October.
Trade negotiations with the EU were still generating concern, especially as the holiday season will make progress less likely. Overall the Pound made significant headway despite fragile sentiment, pushing to highs near 1.2950 on the Dollar while the Euro weakened to near 1.1038. Month-end positioning will likely be evident this week and at market open Sterling has edged lower, the Euro is now near 1.1010.
US consumer confidence declined to 92.6 for July from 98.3 previously and below consensus forecasts of 94.6. There was a net improvement in the present conditions component, but expectations declined very sharply on the month. There was evidence of weaker confidence in states hit by a large number of coronavirus cases, but overall confidence in the labour market improved which will provide an element of relief over underlying trends.
The Richmond Fed manufacturing index strengthened to 10 for July from 0 the previous month with a limited net increase in new and unfilled orders. There was, however, a further decline in employment and capital spending was weak while upward pressure on prices eased significantly.
Overall confidence in the US outlook remained fragile which hampered the US dollar. There were also expectations that the Fed would maintain a dovish stance at Wednesday’s policy meeting and potentially signal a move towards yield curve control at the September meeting. There was, however, limited short-covering ahead of the statement. The Euro corrected lower to the 1.1700 area as the dollar recovered some ground before settling around 1.1725 at the European close. There was little change around 1.1740 on Wednesday ahead of the Fed decision with markets monitoring comments on inflation targets.
The Euro seems to have stabilized above 1.17 against the Dollar after surging to its highest level since September 2018. The common currency continues benefiting from the EU recovery fund agreement and also the upbeat German IFO figures reported earlier in the week.
There were some concerns however over the Euro-zone coronavirus developments as German officials expressed unease over the latest infection developments, especially with other spikes in parts of France and Spain. The Euro, after such strong gains from the previous few sessions does look vulnerable to a correction but has started Wednesday session positive.
As of writing, the common currency trades just over the 1.1750 mark against the US Dollar.
Data to watch
14:00 – USD – Pending Home Sales
14:30 – USD – Crude Oil Inventories
18:00 – USD – FOMC Statement
18:00 – USD – Federal Funds Rate
18:30 – USD – FOMC Press Conference