HomeContributorsFundamental AnalysisPound Touches 1.36 as British Retail Sales Sparkles

Pound Touches 1.36 as British Retail Sales Sparkles

The British pound has posted slight gains in the Wednesday session. Currently, GBP/USD is trading at 1.3529, up 0.16% on the day. On the release front, British Retail Sales was unexpectedly strong, gaining 1.0%. This easily beat the forecast of 0.2%. The US also releases Existing Home Sales, which is expected to improve to 5.46 million. On Thursday, the US will release unemployment claims and the Philly Fed Manufacturing Index.

British Retail Sales sparked in August with a gain of 1.0%, its strongest reading since April. This easily beat the forecast of 0.2%, and pushed sterling to 1.3607 before it dipped lower. On Monday, GBP/USD climbed to 1.3618, its highest level since the Brexit vote in June 2016. Despite a lack of wage growth, British consumers kept their pocket books open in August. The sharp reading will increase pressure on the Bank of England to raise interest rates, which hasn’t happened in a decade.

BoE Mark Carney has often warned about the toll that Brexit will take on the British economy, and he repeated these concerns in a speech at the International Monetary Fund in Washington in Monday. Carney said that Britain’s loss of its trade relationship with the European Union would push inflation higher and slow growth, and labeled Brexit as "an example of de-globalisation, not globalisation." Pro-Brexit supporters have been unhappy with Carney’s stance on Brexit, arguing that high inflation is a result of the BoE’s stimulus program and ultra- low interest rate policy, rather than Brexit. Carney also hinted at a rate hike, saying that monetary policy "would have to move". The pound jumped 3.0% last week, after the minutes of the BoE’s policy meeting strongly hinted at a rate hike before the end of the year. Will the BoE raise rates at the November policy meeting?

All eyes are on the Federal Reserve, as the central bank releases its September rate statement. The FOMC is expected to hold the benchmark rate at 1.25%, so analysts will be looking for details about the the Fed balance sheet and a possible rate hike in December. Earlier in the year, the Fed outlined plans to begin reducing its bloated balance sheet of $4.2 trillion, and the markets are expecting more details, such as a start date for the tapering. The Fed is expected to reduce the balance sheet by not replacing some maturing bonds, starting at $10 billion/month, and gradually moving higher. This move can be viewed as a mini-rate hike, and could provide a boost for the US dollar against major rivals. However, if the Fed does not address its balance sheet, the markets could get nervous and the US dollar could lose ground. As for inflation, persistently low levels remains well below the Fed target of 2% and this has hampered plans for a third rate hike in 2017. Janet Yellen has not discussed a December move, but in recent weeks, some FOMC members have come out against another rate hike before inflation moves higher, even if this means waiting until 2018. If the rate statement addresses the timing of another rate hike, we could see substantial movement from the US dollar.

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