Sterling has had an eventful week. After reaching fresh two year lows on Wednesday, the pound began to rally after some headline fodder from Michel Barnier and some superb Retail Sales figures. Since then, last night’s broad US dollar weakness has seen the pound extend its gains – it’s currently the best performing G10 currency against the dollar, if measured from Wednesday night. Yesterday’s data from the ONS showed headline Retail Sales up a cracking 3.8% year on year, a dramatic acceleration from merely 2.2% in May. The figures illustrate that although investment in the UK has ground to a halt and businesses are concerned over Brexit, so far consumers have remained unfazed and are happy to spend their real wage increases. Given the recent highs in wage growth, there are good prospects for consumer spending to remain strong – provided there is no sudden shock that prompts households to tighten their belts. The Office for Budget Responsibility released its latest report on fiscal risks to the UK yesterday and surprised precisely no one with its conclusion that no-deal Brexit in October would probably result in a recession in 2020, and blow a hole in the UK budget. Anyone who has taken a cursory look at the sterling price over the past two years will already be familiar with this conclusion, so the report did little to move fx.
The euro also traded higher against the dollar overnight, despite a reasonably dovish tidbit of news yesterday from the European Central Bank. The anonymous “ECB sources” story is practically a genre of financial news in itself, and yesterday’s news was a fine example, with Bloomberg reporting that Bank staff were studying a revision of their inflation target. This could include clarifying the 2% inflation target to be symmetric, a change that would be marginally dovish compared to the current “near but below 2%. This morning German Producer Prices printed below expectations, contracting 0.4% in June.
The greenback at first weakened dramatically last night, before paring its gains as New York Federal Reserve President and CEO John Williams gave a speech that will likely be remembered as controversial or perhaps even naive. Last night, Williams said that his estimate of the neutral rate of interest in the US was 0.5%, the lowest since the great recession. He added that in the current context, “When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first signs of economic distress”. Markets duly took this as an unambiguous confirmation that the Fed would be easing rates generously and imminently, and the dollar sold off sharply. But mere hours later, the New York Fed took the extremely unusual step of attempting to walk back its own Chair’s comments, with a spokesperson saying “This was an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting”. The denials suggest an implausible lack of awareness on the part of Williams, a veteran monetary policy decision-maker, about the way his soundbites would be interpreted by markets. The takeaway should be that the fact he was willing to make the statements at all confirms that the Fed is all but certain to engage in an “insurance cut” in the near future.
The loonie managed to surpass last Friday’s year highs against the dollar early this morning – but has retreated slightly since then as the greenback pared back its losses after comments from New York Fed Chair Williams. Spot crude prices have fallen dramatically this week, with WTI dropping from around $61/b to briefly trade below $55 yesterday, but on balance this has done little to blunt the loonie’s recent strength. Today at 13:30 BST Retail Sales data will be released.