The pound jumped over 50 bps as U.K. retail sales unexpectedly increased 3.5% against expectations of a 0.1% decline, which was the most since records began in 1986.
[B]Talking Points
• Japanese Yen: Falls On Dollar Strength
• Euro: Fell Below 1.5500 As Global Outlook Improves
• Pound: Retail Sales Rise Most On Record
• Swiss Franc: SNB Leaves Rates Unchanged
• Canadian Dollar: CPI On Tap
• US Dollar: Philly Fed. On Tap
[/B]
Pound Fails To Sustain Momentum From Jump In Retail Sales. SNB Leaves Rates Unchanged
The pound jumped over 50 bps as U.K. retail sales unexpectedly increased 3.5% against expectations of a 0.1% decline, which was the most since records began in 1986. However, the Sterling would run into resistance at the 1.9700 handle and begin to give back the gains. Economists had expected Britons to slow their spending for a third month which would have been the first time since 1991. However, the warmest May on record led to increases in sales of seasonal foods and clothing of 3.9% and 9.2% respectively. Meanwhile, a separate report showed Public sector net borrowing jumping to 11 billion from 1.8 billion in April, signaling that credit markets may be loosening.
The results starkly contrast BoE Governor King’s warning that things will get worse in his speech last night at the Mansion House. At the same speech Chancellor Darling announced a major shake up of the BoE and the institution of a Financial Stability Committee to sit along side the MPC, leading to the dramatic quitting of member John Grieve. The move came on the heels of Central Bank Governor King’s letter of explanation of why inflation had breached the 3% threshold, where he stated that the future course of interest rates were uncertain.
The EUR/USD was weighed lower by the aversion of a strike by Chevron workers in Nigeria. Also, the better then expected U.K. retail sales numbers fostered hope that the global economy was managing better than expected which added further dollar support, sending the pair below 1.5500
The Swiss National Bank left their benchmark interest rate unchanged at 2.75% as expected. Shortly before the release expectations had grown that the MPC would actually hike rates as inflation concerns mounted. Indeed, the statements following the release showed that the central bank increased their inflation expectations for the year from 2.0% to 2.7% as rising energy and food costs continue to filter throughout the economy. They see inflation risks remaining as long as energy prices remain high. However, the committee would suggest that inflation was transitory and that it would ease to 1.7% in 2009 and 1.3% in 2010. The USDCHF would appreciate over 100 points on the dovish tone, reversing the losses from the rate cut expectations.
The U.S. calendar has the Philadelphia manufacturing report which is expected to show continuing weakness in the manufacturing sector. It will look to support the recent worse than expected -8.2 reading in the Empire manufacturing release. A disappointing result will perpetuate the reemerging dour outlook for the U.S. economy that was fostered by the Goldman Sachs report stating that several U.S. banks would need considerable cash infusions. Also, a recent attack in Nigeria, which shut down a Shell oil field may undue the goodwill from the Chevron strike resolution and potentially weigh on the greenback.
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