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Unexpectedly strong UK retail sales boosted the pound yesterday, as markets eagerly awaited the results of the latest Federal Reserve monetary policy meeting.
GBP/EUR is starting today at €1.1353, while GBP/USD has inched up to US$1.3508 – a move that may not last given the positivity surrounding the Fed’s latest comments. GBP/AUD has soared 0.9% to A$1.6972 and GBP/NZD has climbed 0.4% to NZ$1.8471. GBP/CAD has made more modest gains to hit C$1.6678.
Government borrowing figures for today are expected to show that July’s surplus has again become a deficit in August. Read on to see why this might not bother markets much…
What’s been happening?
The pound was on buoyant form against the euro and US dollar yesterday after strong retail sales data was released for August. Markets had expected month-on-month growth to slow from 0.7% to 0.2%, but sales instead climbed 1%.
Transactions climbed 2.8% year-on-year; double the annualised pace seen in July. These figures exclude sales of fuel.
Considering recent inflation and wage data has shown that the squeeze on real pay (wage growth when the impact of rising prices is taken into account) has worsened, strong retail activity was a relief for the markets.
The US dollar was unsurprisingly on weak form ahead of the Federal Open Market Committee (FOMC) policy announcements. The potential for the results of the latest meeting to drastically change the trajectory of USD had markets in wait-and-see mode before deciding what to do with the US dollar.
This also weighed upon the euro, as the currency is the world’s most commonly traded against the US dollar. When USD strengthens, demand for EUR tends to weaken – and vice versa – so the FOMC meeting had the potential to cause just as much volatility for the euro.
What’s coming up?
UK government borrowing figures for August will be released shortly. Spending is expected to return to deficit after July’s surplus, but as the latter was caused by the payment of self-assessed income tax, such a move on its own won’t perturb the markets. Sterling could fluctuate if the deficit is bigger or smaller than predicted, however.
The euro will be driven by the monetary policy outlook for the Eurozone today, as the events calendar is firmly focussed on the European Central Bank (ECB). As well as the latest ECB Economic Bulletin being published, Executive Board member Peter Praet and President Mario Draghi are due to speak.
The US dollar is likely to continue pressing higher today on the back of yesterday’s FOMC meeting, which saw policymakers announce that the balance sheet would be shrunk by $10 billion per month, starting in October. The FOMC also suggested another rate hike is likely, sending bets of a round of tightening in December up to around 70%.
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