Pound Rebound As Retail Price Rise

[B]- Australian Dollar: Housing remains firm

  • Euro: German Trade Balance grows but export slip
  • Pound: Retail Prices Escalate
  • US Dollar: FOMC on tap

Pound Rebound As Retail Price Rise
FX market spend another quiet night ahead of the marquee event of the day, as traders braced for the FOMC rate announcement due today at 14;15 GMT. Almost no one expects any policy change out of the Fed this month and the only question facing the market is whether the Fed will change any of the language in its post announcement communiqué becoming more hawkish or dovish. There are strong arguments to be made on both sides of the issue. Dollar bears claim that the Fed will have to acknowledge the growing slowdown in housing that is starting to impact consumer spending which could keep growth lackluster for the rest of the year. Bulls on the other hand, argue that despite the problems in the housing sector, the economy remains remarkably healthy with no threat of recession in sight. Therefore, they say, the Fed will maintain its bias towards controlling inflation, signaling to the market that it will not ease in the foreseeable future.
Given, the generally hawkish posture of the majority of voting members of the committee, we have to side with dollar longs and state that the Fed is likely to err on the side of monetary tightening. Several factors, aside from the current state of the economy may affect their decision. Most notably the meteoric rise in the equity market and the concomitant plunge in the dollar. If the Fed were to hint of any possible policy easing, both markets may be pushed further to their extremes. We doubt that the Fed would want to encourage even more speculation in the equities while at the same time see additional depreciation in the dollar that would exacerbate inflationary pressures in US. In short the balance of risks has us leaning towards a more hawkish rather than dovish statement.
Inflation was the subject of concern across the pond today as well, as BRC Shop index for April accelerated to 0.8% from 0.7% the month prior and spurred speculation that BoE may need to raise rates beyond the expected 25bp hike tomorrow. Overall data from UK continues to be buoyant with Nationwide Consumer confidence survey showing gains although the BRC Sales monitor saw the same store sales growth drop a bit form the month prior from 3.9% to 2.4%.
There is some concern amongst analysts that higher interest rates may begin to weigh on the consumer and finally slowing down the red hot housing market, but so far UK economic data has shown little evidence of that happening. Nevertheless, we see little chance of BoE going higher than 25bp hike despite the growing inflationary pressures. UK central bankers will be wary of the risk of a severe slowdown that such a move may precipitate and will most likely opt for a prudent 25bp increase for now.