GBP/USD has recorded slight gains in the Thursday session. In North American trade, GBP/USD is trading at the 1.30 line, for the first time since September 2016. On the release front, UK Retail Sales jumped 2.3%, well above the forecast of 1.2%. Over in the US, jobless claims and manufacturing numbers were strong, as unemployment claims dropped to 232 thousand, lower than the forecast of 240 thousand. As well, the Philly Fed Manufacturing Index soared to 38.8, crushing the forecast of 19.9 points. In Washington, Treasury Secretary Steven Mnuchin testifies before the Senate Banking Committee on the rollback of the Dodd-Frank finance regulations.
British consumer spending has been soft in recent weeks, so the April retail sales report was welcome news. The indicator posted a sharp gain of 2.3%, its strongest monthly gain since January 2016. The British economy has performed fairly well since the Brexit vote last June, but gray clouds remain on the not-too-distant horizon. Analysts expect the economy to lose steam once the thorny negotiations over Britain’s exit from the European Union begin. The Bank of England has been saying that Britons will have to get used to a lower standard of living, and the warning has become reality with the release of the latest wage growth report on Wednesday. Wages rose 21% year-on-year in the first quarter, resulting in real wages dropping for the first time since 2014, after adjusting for inflation. CPI, the primary gauge of consumer inflation, continued to move upwards, posting a sharp gain of 2.7% in April, matching the BoE forecast for inflation in the first quarter. This reading marked the strongest gain in CPI since September 2013. The BoE is expecting inflation to hit 3 percent, raising speculation that the central bank may raise interest rates to keep inflation under control. The weak pound, which is still down 13% since the Brexit vote, has contributed to higher inflation, which has hurt wage growth and caused consumers to scale back on spending, a key component of economic growth.
The political chaos which has gripped Washington has led to nervous investors dumping US dollars, in favor of its rivals, such as the British pound. The beleaguered Trump administration appears to be rudderless as it staggers from crisis to crisis. The latest development is that the Justice Department has agreed to appoint a former FBI director as independent counsel to investigate possible Russian involvement in the US presidential election as well as any connection between Trump and the Russians during the election campaign. On Tuesday, reports surfaced that Trump had asked former FBI director James Comey to close an investigation into ties between Russia and Trump’s former security adviser, Michael Flynn, leading some lawmakers to question whether Trump had committed obstruction of justice. As if this wasn’t enough for Trump’s aides to deal with, the president is under fire for passing classified intelligence to the Russian foreign minister. Trump initially denied the claim, but has since admitted that he did share intelligence with the Russians, arguing that he had acted within his rights. With the Trump administration frantically trying to douse political fires, investors are concerned that Trump will have more difficulty passing into law his plans for increased stimulus and tax reform. If the crisis mode in Washington continues, we could see the dollar lose more ground.
