UK retail sales stagnate

The brief dip in the USD on Wednesday was quickly reversed when the Philly Fed manufacturing index reported a scorching figure on Thursday, prompting the greenback to bounce back.  This surge in the Philly Fed index marked its highest level since 2022, underscoring the robustness of the US economy and driving US two-year bond yields up to 5.00%, though they later retreated.

Following the Office for National Statistics' announcement this morning of stagnant UK retail sales in March 2024 (0% month-on-month), we witnessed a decline in GBP.  However, losses were mitigated by a positive revision from 0% to 0.1% for February's figures. Expectations had been set for a robust growth of 0.3% month-on-month, and GBP/EUR exchange rate dipped from 1.1678 to 1.1668, reflecting market disappointment. Similarly, GBP/USD exchange rate fell from 1.2414 to 1.2405.

The ONS reported increases in sales for hardware stores, furniture shops, petrol stations, and clothing stores. However, these gains were counteracted by declines in food sales and department store activity. Retailers in department stores informed the ONS that high prices had adversely affected trading.

GBP appears poised to sustain its downward trajectory against both the EUR and USD, marking another week of losses against these currencies.  These disappointing retail figures only contribute to the prevailing gloomy sentiment surrounding GBP.

Bank of England Governor Andrew Bailey's remarks midweek have notably contributed to the GBP's underperformance. Bailey's comments to fellow central bankers in Washington indicated that the latest inflation data didn't warrant concern.  Markets interpreted this as a clear indication that he intends to advocate for an interest rate cut in June.

Should a rate cut indeed materialize in June, it would coincide with a similar move by the ECB, potentially stabilising the GBP/EUR exchange rate within its current 2024 range for the foreseeable future.

GBP lower on Bailey Comments

GBP missed an opportunity to leverage the better-than-expected inflation figures midweek due to remarks by Bank of England Governor Andrew Bailey. He hinted at an imminent interest rate cut, dampening the currency's performance.

Despite Wednesday's release of inflation data showing robust levels for March, Bailey appeared unconvinced by the numbers. "Next month's inflation number will show quite a strong drop," he remarked, indicating that the recent drop in UK inflation aligns with the Bank of England's projections.  Market observers have construed Bailey's comments as a signal of his intention to pursue an interest rate cut come June.

However, Bailey seems satisfied with the notion that the Bank can reduce rates without igniting inflation. This lays the groundwork for a possible scenario where UK rates could decrease more rapidly than those in the U.S. and potentially even the Eurozone.  Such disparity is likely to exert downward pressure on the Pound.

This concern was evident in the GBP/EUR exchange rate, which dipped by 0.28% on the day, slipping below 1.17 and hovering around 1.1670 at the time of this writing.  Meanwhile, the GBP/USD exchange rate remains relatively stable near 1.2464, primarily influenced by a broadly weakened USD.

Inflation Boost

GBP received a significant boost as the latest UK inflation data surpassed forecasts, tilting the odds in favour of an August interest rate reduction.   Following the announcement that CPI inflation in the UK rose to 3.2% year-on-year in March, down from February's 3.4% but surpassing market expectations of 3.1%, the GBP/EUR exchange rate surged to 1.1735.

The crucial core CPI inflation rate, as reported by the ONS, increased by 4.2% year-on-year, a slight drop from 4.5%, yet still surpassing market forecasts of 4.1%. Meanwhile, services inflation saw a slight decrease from 6.1% to 6.0%.  However, this level remains elevated, indicating that an immediate rate cut from the Bank of England (BoE) might not be on the horizon.

Markets leaned towards June as the kick-off for the rate-cutting cycle, but some members of the Bank's Monetary Policy Committee have recently indicated a preference for August.  These latest figures will bolster this faction's position in forthcoming discussions.

Adding complexity for the BoE are forecasts suggesting that the Federal Reserve will likely only decrease interest rates once in 2024.  Aligning with the Fed's actions is preferable for the Bank of England and other central banks to mitigate any possible currency devaluation.  A decline in the GBP/USD exchange rate would escalate import expenses, which is particularly unwelcome amid ongoing escalations in global oil and gas prices.

What's crucial for GBP is how market expectations regarding the timing and scale of rate cuts develop.  With Tuesday's wage data surpassing expectations and today's inflation surprise on the upside, the possibility of a rate cut in May is now unlikely.

Rise in UK Unemployment

GBP slipped against both the EUR and USD following the UK's unexpected uptick in unemployment, though its decline will likely be tempered by robust wage growth, fostering a cautious stance at the Bank of England (BoE).  GBP weakened as the Office for National Statistics revealed a rise in the UK's unemployment rate to 4.2% in February, surpassing market expectations of 4.0%.

Meanwhile, the significant average earnings metric, including bonuses, remained steady at 5.6% in February, exceeding market projections of 5.5%. Excluding bonuses, average earnings saw a slight dip to 6.0% from the previous month's 6.1%, yet still outpaced market forecasts of 5.8%.

Former BoE Monetary Policy Committee member Andrew Sentance suggests that UK regular pay growth continues to exceed levels "well above" the 3-4% range typically associated with 2% inflation.  Sentance notes, "Pay growth has only decreased by less than 2 percentage points from its peak of 7.9% last year. There is still a significant distance to cover before wage increases return to a sustainable pace."

The USD may receive another lift as US industrial production data is expected tonight.  After a 0.1% rise in February, headline industrial output is projected to climb by 0.4% month-on-month in March.  Core manufacturing likely expanded by 0.3% during the month, with an increase also anticipated in vehicle output.

Following a notable decline in February, it's anticipated that utilities will rebound. However, mining activity likely decreased throughout the month, primarily driven by a significant drop in coal production.  The USD has attained record highs amid diminishing expectations of Federal Reserve easing – this trend could persist, further bolstering the currency.

 

Monfor Weekly Update

Global markets experienced significant declines on Friday amidst growing geopolitical tensions, particularly concerns regarding a potential Iranian strike on Israel over the weekend.  However, market anxiety eased on Monday following Iran's weekend assault, largely thwarted by Israeli air defences, viewed as a retaliatory measure for an earlier suspected Israeli strike on Syria.  Iran labelled the attack a "success," leading observers to speculate that direct hostilities between Israel and Iran could temporarily subside.

Nevertheless, global markets still face substantial challenges in the upcoming week.  The previous week's higher-than-anticipated US inflation figures prompted a reassessment of expectations for US interest rate cuts, driving the USD to nearly six-month highs.  Conversely, a decrease in European inflation has prompted the European Central Bank to consider rate cuts, possibly as early as June, resulting in a sharp decline in the EUR's value last week.

Looking forward to this week.  The release of US retail sales data will provide insight into the strength of the US economy.  Additionally, the industrial production and Philadelphia Federal Reserve index releases will be closely monitored for further indications of US economic performance.

Data on employment and retail sales from the UK, Germany's ZEW survey, and Australia's employment figures will offer insights into the global economy's health, with investors keenly analysing these releases for signs of economic momentum or potential challenges.

The data focus of the week's foreign exchange markets will be Wednesday's crucial inflation releases from the UK.  A deviation from expectations could significantly impact the value of GBP, with any shortfall compared to consensus forecasts likely exerting downward pressure.

Conversely, an inflation reading exceeding consensus (where consensus stands at 2.9% year-on-year) would likely bolster GBP, potentially altering expectations for the timing of the first interest rate cut from June to August, positioning the Bank of England differently from the ECB regarding the initiation of rate cuts.

Please note:  The news and information contained on this site should not be interpreted as advice or as a solicitation to offer to convert any currency or as a recommendation to trade.

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