Highlights from last week:
- GBP/USD reaches seven-month high
- UK consumer comes to sterling’s rescue
- Steady euro zone growth ensures euro gains
The week ahead:
- Euro zone consumer inflation data (Wednesday, 10.00am)
- US Federal Reserve policy meeting minutes (Wednesday, 7.00pm)
- UK GDP data (Thursday, 9.30am)
Pound spurred by buoyant retail sales
Sterling burst through the psychological $1.30 barrier against the US dollar for the first time in more than seven months last week after a much stronger than expected rebound in UK retail sales in April.
Sales volumes leapt 2.3% last month, reversing March’s 1.4% drop and then some. The figures may have been flattered by warm weather and this year’s later timing of Easter, but perhaps serve as a timely reminder not to underestimate the resilience of consumers despite the tightening squeeze on household budgets coming from rising inflation and muted earnings growth.
The pound had been struggling to make headway versus the euro, slumping to a six-week low of €1.1605 after annual inflation in the UK accelerated to 2.7% in April. This was inflation’s highest level since September 2013 and slightly ahead of market expectations for a rise to 2.6%, suggesting markets still don’t see the rise adding too much pressure on the Bank of England to lift interest rates anytime soon. Elsewhere, a drop in the unemployment rate to a 42-year low of 4.6% underscored the labour market’s wider resilience, although whether this can be sustained might be questionable given we’re yet to see how the early stages of upcoming Brexit negotiations might unfold.
Political storm piles pressure on US dollar
The lingering political storm in the US surrounding President Trump continued to heap further pressure on the US dollar last week. Recent reports of interference into an FBI investigation cast some doubts over whether he can deliver the pro-growth economic reforms which were supporting expectations for the Federal Reserve to carry on lifting interest rates gradually this year.
Elsewhere, a mixed bag of economic data releases failed to stem US dollar losses. The US industrial sector enjoyed a solid April with production growing at its fastest pace in over three years, whilst the number of new homes constructed fell for a second consecutive month in April.
Euro firmer amid improving growth prospects
As well as making inroads against the pound, the euro also extended gains against the US dollar, reaching highs not seen since November last year.
The common currency started the week on the front foot after a convincing win for Chancellor Angela Merkel in Germany’s regional elections. Growth in the euro zone helped bolster euro prospects with the economy expanding 0.5% in the first quarter of 2017 and 1.7% year-on-year. Strong growth was also evident in the zone’s peripheral economies with Romania’s economy expanding by 5.7% from a year earlier, whilst both Poland and the Czech Republic also enjoyed improved growth at the start of the year.
The Australian dollar retreated to intra-week lows of A$1.7575 versus the pound after minutes from the latest Reserve Bank of Australia revealed caution surrounding both the country’s overly-buoyant housing market and recently sluggish labour market. The Australian dollar did pare some losses toward the week’s end following the release of better-than-expected employment figures with the number employed rising by 37,400 during April.
Domestic Japanese data largely took a backseat last week with the Japanese yen taking direction from wider global influences. Wavering financial markets saw the yen benefit from its perceived ‘safe haven’ status, reaching weekly highs of ¥143.33 against sterling. Japanese industrial production fell 2.1% during March, cancelling out a large part of February’s 3.2% gain, whilst Japan’s economy grew at its fastest rate in a year during the first quarter.
The Canadian dollar finished last week relatively flat against the pound after dropping to lows of C$1.7819. Despite a spike in the country’s petrol prices, consumer inflation remained stagnant during April. Retail sales did help bolster underlying support for the dollar however, with sales beating market expectations, rising by 0.7% in March.
The week ahead
Showcasing the current health of the UK’s economy will be Thursday’s release of GDP data (9.30am). However with the recent pickup in consumer inflation, growth figures could be subdued thanks to the rising costs of living in the UK. Public sector net borrowing data will be heard prior on Tuesday at 9.30am, whilst mortgage approvals data will be released on Thursday (9.30am).
Headlining the US economic calendar this week will be the release of the Federal Reserve’s latest interest rate policy meeting minutes (Wednesday, 7.00pm), whilst both GDP data and durable goods orders will follow on Friday at 1.30pm. Euro attentions will firstly turn to Tuesday’s release of both service sector and manufacturing sector activity data (9.00am), with German consumer confidence data to follow on Wednesday at 7.00am.
Other key data releases:
New Zealand trade balance data (Tuesday, 11.45pm)
Swiss industrial production data (Wednesday, 8.15am)
Bank of Thailand interest rate policy meeting (Wednesday, 8.30am)
Bank of Canada interest rate policy meeting (Wednesday, 3.00pm)
South African Reserve Bank interest rate policy meeting (Thursday, 2.00pm)