UK tightens purse strings
UK retail sales data printed notably weaker than expected for the second month running, prompting the Office for National Statistics to comment that the data indicated the first signs of a fall in the underlying trend since December 2013. The sharp increase in fuel prices had an central role in curbing spending and will fuel expectations that higher prices during 2017 will undermine sales growth which will then undermine the wider economic growth trends.
Following the data release the Pound slumped further below 1.2400 and the Euro strengthened to the 1.1655 area on reduced expectations of UK rate hikes.
The seasonally-adjusted Euro-zone current account increased to EUR 31.0bn for December and the surplus increased to EUR365bn and 3.4% of GDP for 2016. The current account surplus was offset by substantial selling of Euro-zone bonds, but the data illustrates that there will be structural Euro support and the currency could strengthen sharply if there is a significant shift in capital-account trends.
Angela Merkel stated over the weekend that the Euro was too weak for the German economy, but also indicated that this was due to ECB policies. The markets will be watching for any related comments from the new US administration. There were further concerns surrounding the French Presidential election on suggestions that the left-wing parties could pick a united candidate which could substantially increase the chances of getting into the second round and potentially push centrist voters towards Marine Le Pen.
Monetary policy guidance and strong U.S. data failed to provide another push higher for the Dollar last week. Fed Chair Janet Yellen made a blunt statement in her testimony before Congress that it would be unwise to wait too long to tighten monetary policy. The FOMC minutes due for release on Wednesday may reverberate recent hawkish remarks made by Fed officials. Any discussion of scaling down the Fed’s balance sheet will likely support the Dollar. The US Market is shut for President’s Day today and apart from the FOMC minutes and Fed officials scheduled speeches there’s no tier one data this week.
Data to watch: US Bank Holiday: Presidents Day. EUR EcoFin Meeting. 7am German Producer Price Index. 3pm EUR Consumer Confidence.