Above: GBP/EUR (top) and GBP/USD at five-minute intervals.

Source: Poundsterlinglive

UK retail sales picked up pace in August, as consumers’ desire to take advantage of sunny weather and summer discounts offset gathering political and fiscal anxieties. The volume of goods sold in stores and online increased 1% after shoppers splashed out on food and clothing, the Office for National Statistics (ONS) said on Friday. The reading, which was stronger than the 0.4% increase expected by economists, follows a revised gain of 0.7% in the previous month.

“Retail sales rose in August as warmer weather and end-of-season promotions helped to boost sales, most notably for clothing and food shops,” ONS chief economist Grant Fitzner said. “Retail sales have also increased across the three-month and annual period, following strong growth from online retailers.”

The figures suggest British consumers were optimistic in August despite a wave of anti-immigrant riots that gripped parts of England earlier in the month and Prime Minister Keir Starmer’s warnings of tough fiscal decisions ahead. Separate data released earlier on Friday showed consumer confidence turning negative in September, which research firm GfK attributed to concerns about the Labour government’s tax and spending plans.

“While consumers are showing a willingness to spend on essential and semi-discretionary categories, consumer confidence has dropped likely reflected in deferring the purchase of big-ticket items,” said Tom Youldon, a partner at McKinsey.

Nonetheless, households have seen wages grow faster than prices in recent months, while inflation for some staple goods like clothing and food cool down. Sunny weather also boosted food sales, which recorded their biggest annual jump since 2021.

The pound extended gains after the data, rising as much as 0.2% to US$1.3313 (RM5.62), near the highest level since March 2022. The currency got a boost on Thursday after the Bank of England held interest rates unchanged and warned investors it won’t rush to ease monetary policy, contrasting with a more dovish approach from the US Federal Reserve earlier this week.

Sales volumes rose 2.5% in the year to August, the largest annual gain since February 2022. Overall, volumes have almost recovered back to pre-Covid levels seen in February 2020.

Sunny weather boosted food sales, which recorded the biggest annual jump since 2021, while clothing sales also saw a strong increase thanks to end-of-season discounts. At the same time, non-store retailing, which includes online shopping, fell 1.7% on the month.

“The sharp pickup in retail sales in August leaves it on course to provide support to headline GDP growth in 3Q. While the cooling of sentiment indicators raises the risk that momentum will ease in the near term, our base case is that positive real wage growth continues to bolster spending in the quarters ahead. The prospect of healthy consumer demand is likely to keep the Bank of England cautious about how quickly it lowers interest rates,” said Dan Hanson, chief UK economist at Bloomberg Economics.

Temperatures were above average across the country in August, according to the Met Office. Aug 12 was the hottest day of the year to date, with temperatures of 34.8°C (95°F) recorded in Cambridge.

British retailers Ocado and Next lifted their sales outlook for the rest of this year after a stronger-than-expected third quarter. Next said shoppers are already spending on Autumn clothing and buying more full-price items.

Separate figures from the British Retail Consortium showed retail sales recorded their strongest growth since March. Consumers are still indulging in small luxuries, helping fuel a bounce back in card spending in August after two months of declines, according to Barclays.

“If inflation continues to hover close to the 2% mark, consumers may start to experience a modest increase in purchasing power over the crucial golden quarter,” Youldon said. “But with higher energy bills on the horizon from October, many will be mindful of making discretionary purchases and continue to look for opportunities to trade down.”

Source: Theedgemarkets

USD: Softer amid intra-day volatility

Amid much intra-day volatility, DXY is down around 0.5% on the week. That's not much, but DXY is now just a whisker away from the lowest levels in two years. The story here is fading US exceptionalism as acknowledged by the Fed in this week's pre-emptive 50bp rate cut. So far, equity markets like what they see and interest rate-sensitive growth stocks have performed well. It seems obvious now that US labour market data will be the key macro driver of the dollar story into year-end. That's why the dollar saw a decent intra-day bounce yesterday on the lower-than-expected weekly initial jobless claims data.

The dollar is also moving in line with the US yield curve, where the expected steepening at the start of a Fed easing cycle is normally a weaker period for the dollar. Equally, seasonal factors tend to turn against the dollar from October onwards and we would add that the external position for the dollar is starting to look a little weaker. US second quarter 2024 current account data released yesterday saw the deficit widen to a reasonable 3.7% of GDP. On the financial flows side, the majority of flows into the US were in the long-term debt category. We wrote on the subject earlier this year that heavy inflows into long-term debt could cause a problem for the dollar should the lack of any fiscal consolidation undermine the US Treasury market over coming years.

But the big question for the market right now is whether the dollar is ready to break out of its two-year range. We think it may well do because of some of the factors outlined above, but the timing remains uncertain. One never knows whether investment committees of buy-side firms decide to raise their FX hedge ratios on US investments and put dollar sell orders through at the WMR fix at 4pm London time.

There seems nothing on the agenda today to justify a breakout, but suffice to say we are in the camp looking for some strong follow-through selling should DXY support levels at 99.50/100 give way.

Also, look out for the Bank of Japan press conference. We do not fully understand the reference in today's BoJ statement that FX markets can affect prices more than before because domestic wages are growing. Perhaps Governor Ueda will explain more in the press conference. In general, however, we remain bearish on USD/JPY and favour a move to 138 over the coming weeks.

EUR: Don't want to miss the breakout

Having bounced around on yesterday's US initial claims data, EUR/USD is back near the recent highs at 1.1180. This looks to be a function of a broad move in the dollar. We have mentioned this before, but EUR/USD looks to be on the verge of breaking out of a low volatility range. For example, a weekly close above 1.1160 - the upper twenty-month Bollinger Band - warns of a sizable upside breakout. At this stage in the US cycle, we believe an upside EUR/USD breakout is entirely possible.

There seem no immediate catalysts for that upside breakout today given the lack of US data and only second-tier eurozone releases. Let's look out for a speech from Christine Lagarde at 17CET today. The market still has 6bp of an October ECB cut priced - which should come out of the market at some point. A 1.1150-1.1200 EUR/USD range may well be seen today, though we retain an upside bias.

Elsewhere, EUR/CHF is moving higher. A better risk environment may be helping - but so too is USD/CHF. Here, USD/CHF seems to spike higher every time it trades below 0.8400. Whether that is a commercial or Swiss National Bank flow is hard to say. We would not chase EUR/CHF higher, however, since the SNB may not deliver on all of the dovishness priced into next week's policy meeting.

GBP: Hard to argue with sterling strength near term

Sterling's rally on yesterday's Bank of England communication looks fully justified. UK short-dated yields rose relative to their eurozone counterparts as the BoE stuck to the new script of 'gradual' easing. The BoE does genuinely seem to be questioning whether inflation will come down as much as elsewhere in the world and continues to present three scenarios. The BoE certainly does not seem to be in the Fed camp of signalling the 'all-clear' on inflation. Our UK economist, James Smith, does expect the BoE to come round to the Fed's way of thinking. That may take some time, however, and in the meantime, sterling can continue to do well.

Thus it's hard to rule out GBP/USD making a push to the 1.35 area, while EUR/GBP could extend to 0.8340. August UK retail sales have helped sterling today, but leading indicators for consumer confidence warn that consumers are starting to become fearful of the 30 October UK budget.

CEE: Market gaining before central bank meetings next week

The last day of the week should be quiet with an empty calendar in the CEE region. However, the FX market has a lot to absorb. Overall, we remain bullish on the CEE region, just like at the start of the week. The most attractive at the moment seems to be Hungary's forint, which in the rates market repriced up significantly for no visible reason, while EUR rates fell slightly. Thus, at the end of the day, the interest rate differential moved to the highest level in weeks, adding support to FX. Moreover, EUR/USD is still testing higher levels favouring CEE currencies in general. Thus, we think EUR/HUF should move into the 392-393 range by Tuesday's National Bank of Hungary meeting, supporting a 25bp rate cut, which is our economist's call. On the other hand, Tuesday's meeting should be a reason for a reversal and our medium-term view is more negative on HUF, with the upper side of our trading range for the rest of the year at 392-400.

Another currency preparing for next week's central bank meeting is the Czech koruna, which has been enjoying stronger values in recent days and is slowly approaching 25.00 per euro. As we mentioned earlier, the market pricing is still on the very dovish side, but given the core story, it makes no sense to go against the received market. On the other hand, still, the Czech National Bank meeting should be reasonably hawkish and CZK should benefit the most from it. Therefore, we still find the CZK attractive for the days ahead, when we should test 25.00 EUR/CZK.

Markets

Wednesday’s bumper 50 bps Fed kick-off resulted in a further steeping of the US curve, with the short end still challenging recent lows. The intraday price dynamics was briefly interrupted by a better than expected Philly Fed business outlook and even more by a decline in the weekly jobless claims (219k from 231k). This supports Powell’s view that the Fed isn’t behind the curve and that it is supporting the economy/the labour market while it is still strong, helping to engineer a soft landing of the US economy.

Even so, markets soon resumed their intraday pattern. US yields changed between -3.6 bps (2-y) and +3.0 bps (30-y). The US 2-y yield is only a whisker away from the March 2023 low (3.55% area). The rise in LT yields was mainly driven by a rebound in inflation expectations (10-y + 5.0 bps). The 10-y real yield declined 5.0 bps.

This idea of a soft landing/mild reflation further propelled equities with the Dow and the S&P closing at new record levels. Reflationary hopes, amongst others, also supported a further rebound in the oil price (Brent $74.5 p/b). German yields traded in sympathy with the US (2-y -4.2 bps, 30-y +4.5 bps).

US curve steepening and an outright risk-on context kept the dollar in the defensive, especially against the likes of the euro or currencies sensitive to the overall economic cycle (AUD, NZD…). EUR/USD closed at 1.1162, with the august top (1.1202) within reach. USD/JPY gained mostly (142.6 from 142.3) on yen underperformance.

The eco calendar in the US and EMU is almost empty. We expect technical trading going into the weekend. The steepening trend might continue as markets can still raise the odds for follow-up 50 bps steps from the Fed in November and December. However, such a push needs more soft data, which we won’t get today. The dollar still remains at risk to fall below key support levels (EUR/USD 1.1202/1.1276, DYX 100.55/99.58).

This morning, UK data printed mixed. GfK consumer confidence unexpectedly tumbled from -13 to -20. Consumers turned more pessimistic both on their personal situation as on the global economic outlook. UK August retail sales printed at a much stronger than expected 1.0% M/M and 2.5% Y/Y. Yesterday, the BoE let its policy rate unchanged at 5.0% after an inaugural step in August as it wants to take a cautious approach as core/services inflation remains elevated. After the retail sales release, EUR/GBP is heading for a test of the YTD lows (0.8383 area).

News & Views

The Bank of Japan kept the policy rate unchanged at 0.25%. The status quo was widely expected after a previous hike rattled markets end July/beginning of August.

Language at that time signalling further hikes if the July outlook would materialize, didn’t make it in the statement this morning. Still, the BoJ upgraded its assessment of private consumption from “being resilient” to “being on a moderate increasing trend” thanks to a virtuous cycle from income to spending.

Along with improving exports and against a background of accommodative financial conditions that should help Japan’s economy grow at a pace above potential. Inflation, both headline and underlying, are seen evolving according to the July outlook.

The gauges are still seen to be consistent with the 2% target somewhere in the second half of the projection period.

Inflation figures printed as fresh as this morning and ahead of the policy meeting outcome showed prices rose at a quicker pace in August.Headline CPI rose from 2.8% to 3% while the core measure (ex. fresh food and energy) fastened from 1.9% to 2%. The BoJ’s preferred gauge (ex. fresh food) picked up from 2.7% to 2.8%. The market reaction was a dull one with some minor JPY appreciation to USD/JPY 142.33.

Graphs

GE 10y yield

The ECB cut policy rates by 25 bps in June and in September. Stubborn inflation (core, services) make follow-up moves less evident. We expect the central bank to stick with the quarterly reduction pace. Disappointing US and unconvincing EMU activity data dragged the long end of the curve down. The move accelerated during the early August market meltdown.

US 10y yield

The Fed kicked off its easing cycle with a 50 bps move. It is headed towards a neutral stance now that inflation and employment risks are in balance. Conservative SEP unemployment forecasts risk being caught up by reality and with it the dot plot (50 bps more cuts in 2024). We hold our call for two more 50 bps cuts this year. Pressure on the front of the curve and weakening eco data keeps the long end in the defensive for now as well.

EUR/USD

EUR/USD moved above the 1.09 resistance area as the dollar lost interest rate support at stealth pace. US recession risks and bets on fast and large rate cuts trumped traditional safe haven flows into USD. EUR/USD 1.1276 (2023 top) serves as next technical references.

EUR/GBP

The BoE delivered a hawkish cut in August. Policy restrictiveness will be further unwound gradually on a pace determined by a broad range of data. The strategy similar to the ECB’s balances out EUR/GBP in a monetary perspective. Recent better UK activity data and a cautious assessment of BoE’s Bailey at Jackson Hole are pushing EUR/GBP lower in the 0.84/0.086 range.

Source: ACTIONFOREX