The dollar could not find support on the closely watched US retail sales figures released during the European session as the numbers came in lower than forecast, while risk-off sentiment continued weighing on the currency. Among major currencies, though, the pound was the best performer as it managed to reach post-Brexit levels after BOE’s Gertjan Vlieghe signalled that a rate hike might emerge in next months.
While investors anticipated US retail sales to grow by 0.1% m/m in August, the actual change was negative at -0.2% affected mainly by the impact of Hurricane Harvey on motor vehicle purchases. This was the biggest decline recorded in six months, pointing that consumption would likely moderate in the third quarter. The previous post of a growth of 0.6% was also revised downwards to 0.3%. Excluding automobiles, core retail sales increased by 0.2%, falling short of the 0.5% expected and 0.4% (revised downwardly from 0.5%) observed in July.
US industrial production also missed forecasts, falling by 0.9% m/m and reaching the biggest drop since April 2016. Projections were for industrial output to climb by 0.1%, below the 0.4 posted in July (upwardly revised from 0.2%).
The index pertaining to the University of Michigan’s preliminary survey on consumer sentiment for the month of September, released during afternoon European trading hours, surprised to the upside. Specifically, the reading came in at 95.3. Expectations were for it to stand at 95.1, while the final reading for August stood at 96.8.
Next up, markets will look forward to the FOMC meeting on Wednesday, where Fed voting members would have to decide whether to raise interest rates given better than expected inflation numbers, a low unemployment rate but a sluggish wage growth. Moreover, Fed policymakers would keep in mind the financial impact of the two tropical storms Harvey and Irma as the New York President William Dudley said a week ago that the damage caused by those storms might influence the timing of the next rate hike.
The dollar index was under pressure during the European session, touching an intra-day low of 91.54 after today’s data out of the US reduced optimism about the strength of the economy. Moreover, North Korea’s latest missile test earlier today made investors look for less risky assets.
The safe-haven yen was up by 0.54% on the day with dollar/yen touching an intra-day low of 110.60 before it jumps to 110.82. Recall that the Bank of Japan will launch its policy meeting on Thursday with markets projecting the bank to maintain its ultra-easy monetary strategy.
A day after the Bank of England (BOE) held interest rates steady at record low of 0.25% and hinted through its statement a potential rate hike in the coming months, BOE Monetary Policy Committee (MPC) member, Gertjan Vlieghe, added more weight on the latter, clarifying that the central bank should raise rates "as early as in the coming months". Vlieghe, considered as one of the dovish MPC members, said that with the unemployment rate receding and wage growth expected to rise, pushing inflation further above the BOE’s target rate, monetary policy should be tightened. This convinced markets that the BOE might deliver a rate hike for the first time in a decade as soon as November.
In other news out of the UK, several people were injured after an explosion in Parsons Green Underground Station in west London. This is currently suspected as a terrorist action. Despite this incident, the pound peaked at a post-Brexithigh of $1.3615 before slipping to 1.3577, up by 1.36% on the day and by 3.30% during this week, gaining by the hawkish message of Vlieghe.
In the Eurozone, wage growth (not seasonally adjusted) came in higher in the second quarter, rising by 2.0% y/y compared to the 1.3% seen in the first quarter, increasing the odds that the ECB will announce an outline of its stimulus reduction in October. However, on Monday, the central bank will analyze the block’s CPI readings for the month of August to see whether higher wages drove prices towards the bank’s 2% target.
In another report, the euro area’s trade surplus came in at 23.2bn euros, better than the 21.4bn euros that was expected but below the previous mark of 26.6bn euros.
The euro hit an intra-day high of $1.1986 following the disappointing US retail sales figures, before later falling to $1.1977, reversing the losses made over the last two days relative to the US currency. Against the pound, the euro ticked up to 0.8812 after reaching a two-month low of 0.8773 earlier in the session. Euro/pound was still significantly down on the day.
Regarding commodities, oil prices recovered during European trading, while gold continued its downtrend. WTI crude edged up to $49.91 per barrel while Brent jumped to $55.74. Gold was trading lower at $1,321.7 per ounce.
