Sterling drops as Euro gains...

Week Commencing Monday 22th May 2017


UK: Retail Sales bounce back despite income squeeze on households.

UK retail sales bounced back significantly in April as shop prices fell, according to the latest data from the Office for National Statistics.

The pound broke through the psychologically important 1.30 on the news, the first time it has been above that level since the end of September 2016.

Retail sales volumes were up 4 percent on the same month a year earlier, accelerating from the 1.7 percent growth rate registered the previous month. On a quarterly basis there was a 0.3 percent increase in volumes, following a decline in March. This is undoubtly good news for the UK economy, however rising prices are continuing to stretch household budgets.

While the volume of goods bought by shoppers rose by 4 percent on the year, the amount of money they had to spend on those goods jumped by 7.1 percent. Diving into the figures, shoppers continued to spend on clothes and shoes, with sales rising by 5.1 percent on the year. By value, spending rose by 7.5 percent to a weekly average of just under GBP 1 billion.

JAPAN: GDP is back, but is it here to stay?

Japanese GDP rose more than expected during the first quarter, rising by 0.5 percent during the period.

This accounts for the fifth straight quarter of expansion, supported by continued strength in exports and domestic demand. Domestic demand rose 0.4 percent compared to the December quarter, marking a return to growth after coming in flat in Q4 and contracting the quarter before that. Private consumption likewise rose to 0.4 percent last quarter after stagnating in Q4.

Residential investment growth ticked up to 0.7 percent from 0.4 percent in the quarter prior, while quarterly growth in government consumption held at 0.1 percent. Despite the figures, analysts remain concerned that with an aging population and nearly maxed employment figures, levels of growth may not be sustainable.

Also, weak readings are casting doubt on the Bank of Japan’s exit plan from its ultra loose monetary policy. All things being equal, the worlds third largest economy is not out of the woods yet!

GENERAL ELECTION: Labour tightens the race after Conservative manifesto disappoints.

UK general election polling has heated up, with the latest string of polls putting labour on between 35 percent and 33 percent, up significantly on the scores as low as 26 percent earlier in the campaign.

The Tory advantage was narrowed to just nine points in one survey by YouGov, the first time it has been in single figures in a mainstream poll since Theresa May called the snap election on April 18. This has prompted a strong assault on Labour by the Conservatives, with Jeremy Corbyn’s historic association with the IRA in focus.

Odd’s of a conservative victory remain unchanged, however this proves that everything remains to play for in this election. With Brexit talks likely to start almost immediately, these are crucial days for the country!


FX Forecast

Sterling (GBP) - Sterling dipped towards the end of last week as opinion polling suggested Labour closing the election gap against the Tories, pushing Cable back through 1.30 and GPB/EUR through the crucial 1.16 level.

We expect Sterling to trade a mixed bag this week, especially given the second posting of GBP and Carney are unlikely to surprise markets. Expect a reasonably stable trading session therefore.

US Dollar (USD) - The Dollar continues to either lose ground or stagnate versus most majors as the pressure continues to mount on President Trump. EUR/USD continues to push higher with the rate finally above 1.11, while Election woes have reversed Cables recent gains.

As above, we expect a mixed bag with the Dollar on the back foot, so expect further small gains on EUR/USD and a range bound GBP/USD figure this week.

Euro (EUR) - The Euro continues to perform having crystallised gains against most majors. We expect this trend to continue, albeit at a more modest rate this week. Expect EUR/USD to test and break through 1.12 while GBP/EUR could drop below 1.15 if we continue to see strong Labour poll numbers.


Economic Calander for the Week

UK Data:

We have a busy week for the UK, with the inflation report hearing on Tuesday and GBP on Thursday headlining. Starting off, Mark Carney is due to testify in front of the Treasury Committee in Parliament Tuesday. Any questioning relating to either Brexit or monetary policy could well spark some GBP volatility. GDP is the key number this week, with the figure likely to be confirmed in at 0.3 percent for the first quarter, bringing year on year growth to 2.1 percent.

US Data:

We have a big week for the US with the FOMC Meeting the highlight. We start with Tuesday’s New Home Sales, where we expect 610k units sold in April. Wednesday will be dominated by the FOMC, where are hint of policy shifts on the back of Trump impeachment risks will signal sharp selling of the Greenback.

Moving to Friday, we expect to see a rebound in Core Durable Good Orders to 0.5 percent from -0.2 percent. GDP meanwhile should post a .0.9 percent number for the first quarter (annualised).

EU Data:

We have a slow week for Europe with Mario Draghi headlining on Wednesday. He is scheduled to speak at the first conference on Financial Stability organised by Banco de Espana and Centro de Estudios Monetarious y Financieros in Madrid. Any Brexit or QE talk/questions could impact EUR and GBP prices moving into Thursday.



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