Sunshine spending sorts out Sterling
Bumper UK retail sales data smashed expectations with a monthly volume increase of 2.3% compared with consensus forecasts of 1.0%. Sales were boosted by the impact of a late Easter and by warmer, drier weather. However, the impact of declining real wages generates expectations of a slower growth of sales over the next few months.
Sterling pushed sharply higher after the data with a move above 1.3000 against the Dollar for the first time in close to 8 months, and pushed the Euro back to the 1.1710 area.
The Conservative manifesto didn’t move the Pound much, although the implications of a looser fiscal policy could push the Bank of England towards an earlier increase in interest rates. Just after the European close, the Pound suddenly spiked lower in a mini flash-crash to below the 1.2900 level against the Dollar as the US currency gained fresh support. Overall sentiment held firm with Sterling recovering ground on Friday.
Yesterday saw the release of the minutes from the European Central Bank’s (ECB) April policy meeting. After 5,500 words and 32 mentions of risk, the view on outlook have not changed much. Although ECB officials continued to stress the need for caution in making changes; there were no significant comments from President Draghi.
The eco calendar is as empty as the office biscuit tin with only EMU consumer sentiment. A slight further improvement is expected. More important might be speeches by ECB officials Praet and Constancio. However, in times of market turmoil, central bankers normally avoid themes like the exit policy.
US initial jobless claims fell to 232,000 in the latest week, the third successive week below 240,000. The Philadelphia Fed index also beat expectations with an increase to 38.8 for May from 22.0 the previous month. Expectations of a strong labour market and firm tone in manufacturing have been maintained by the releases.
Cleveland Fed President Mester warned over the dangers of falling behind the curve and called for further interest rate increases. The firm data helped stabilise interest rate expectations with futures markets suggesting the chances of a June rate hike had increased back to near 74%. Markets will monitor comments from Fed officials, especially as there are only two more weeks before the blackout period ahead of the Fed’s June meeting.
Data to Watch:
7:00am EUR GER Producer Price Index (YoY) (Apr).
3:00pm EUR Consumer Confidence (May).
6:00pm USD Baker Hughes US Oil Rig Count.