Talking Points
· Euro: PMI Remains in Contraction
· British Pound: Retail Sales Rebound
· US Dollar: Philadelphia Fed On Tap
Pound Reverses Despite U.K. Retail Sales Rebound, Euro Heavy As PMI Remains In Contraction
The pound jumped over 60 bps on a surprising rebound in U.K. retail sales, reaching as high as 1.8707. Consumer consumption rose 0.8% in July from a record fall of 4.3% the month prior. June’s drop was revised lower from an initial reading of 3.9%, which along with prices rising 1.6% took some of the steam out of the Sterling rally. The breakdown revealed that apparel and household goods purchases rebound from -6.9% and -5.7% to 1.5% and 1.6% respectively.The pair would ultimately fall back below 1.8630.
If domestic growth in the U.K. can remain resilient then the Governor King and the MPC can continue to maintain their neutral bias as the wait for inflationary pressures to ease as they predicted in their quarterly inflation report. The central bank is expecting prices to fall below their 2% target in two years dragged lower by slowing growth. The labor market which lost at least 20,000 jobs the last two months and tight credit conditions remain should weigh on domestic growth going forward. Further contraction could push the economy into a recession, forcing the BoE to take preventive measures.
The Euro traded heavy after reaching as high as 1.4835 on the back of a PMI reading below the 50 boom/bust level for a third straight month. The gauge that tracks spending by business leaders slightly improved to 48.0 from 47.8, but continues to signal weakness in the economy. The pair would reverse earlier gains before finding support at 1.4745. If downside risks continue to grow the ECB will have to start to question their staunch hawkish bias, especially as price pressures continue to ease.
Although the U.S. calendar is full of tier two indicators the total impact from them could present significant event risk for the U.S. dollar. Another week of jobless claims above 400,000 is expected as the labor picture continues to worsen. Indeed, the leading indicators metric is expected to fall 0.2%, signaling further deterioration for the economy lies ahead. Meanwhile the Philadelphia Fed is expected to show a slight improvement but will remain in negative territory. The total message from the economic releases today could be that the U.S. economy is far from rebounding, which should keep the Fed on hold and limit bullish dollar momentum.
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