Positive retail sales just a blip

Currencies Direct May 20th 2011 - 2 minute read

Strong retail sales figures, driven by warmer weather and the royal wedding (apparently), gave Sterling a lift in early trading yesterday. But it was not enough to sustain the trend once America woke up and the Pound duly gave back any gains to finish the day broadly flat. Once the dust had settled the consensus was that April’s data is likely to be just a blip in an otherwise disappointing trend. Also yesterday the Bank of England’s chief economist, Charles Bean said the bank had accepted higher than target inflation in an aim to rebalance the economy towards exports and business investment and he suggested that to achieve their two percent target would have required a markedly higher bank rate and with it a higher level for Sterling. What he was implying is that if the Bank had raised rates, the squeeze on consumers would have been worse than is now, and shows just how tight the path the bank is currently walking actually is. No Sterling data is due today and the next important figure is UK GDP figure early next week.

A large amount of data on the US economy was released yesterday. Better than expected weekly jobs data and a very disappointing Philly Fed reading caused Dollar gyrations for most of the afternoon. The market seems to be trying to work out what the end of QE2 means for the Dollar at the same time as trying to guess from the data whether there may be further on the horizon – and the result is high volatility across the Dollar pairs. Next week sees US GDP figures from the first quarter so we may finally get see the market clarity of what direction it expects the Fed to pursue.

Eurozone leaders seem to be playing a high stakes game of poker with the market over the potential (or not) restructuring of Greek debt. On one side, the market is betting that some sort of restructuring, either soft via extending bond maturities or hard via hair cuts will have to take place. On the other we have EU and ECB officials suggesting any restructuring would block Greece from accessing funds because its collateral (government debt) would not longer be accepted at the central bank. Given the lifeline that central bank funding has given Greece, this is no empty threat. But the uncertainty this is creating keeps investors away from periphery Eurozone debt and Euro sentiment remains on the bank foot going into the weekend.

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