Traders Alter Rate Expectations After Record Surge In UK Retail Sales

The wind direction has changed suddenly in the UK. After several disappointing UK economic data and higher than expected inflation numbers, most market players are caught by surprise by today’s release of UK retail sales which came out much better than even the most optimistic estimates. UK retail sales data surged 3.5% m/m and 8.1% y/y in May on increased food and clothing sales, eclipsing the -0.1% and 4.1% average forecasts. The 3.5% increase in UK sales was the most since the government survey began in 1986. In April, sales fell 0.3%. The year-over-year increase was the highest since 2002. These are enormous gains, and traders and economists are finding that hard to believe.

Whether May’s retail figures are a fluke or not, the bonds and currency markets are busy adjusting their outlook again. The British pound rocketed against other currencies today and two-year gilts had the biggest fall in four days after the sales report. The pound also got some support from BOE governor King’s speech made yesterday. He said, “The Monetary Policy Committee is prepared to take whatever action is needed to return inflation to the 2 percent target and to keep expectations of inflation in the medium term anchored to the target.”

Remember King had said in his letter to the Chancellor of the Exchequer Alistair Darling that the path of rates is uncertain? Well, his tone has changed a little, perhaps he realized he had been too dovish, and now wants to give the impression that he too can be an inflation fighter. Today, traders are again factoring in some chance of interest rate hikes by the BOE; even JP Morgan is now expecting an August rate increase.

Soft US Manufacturing Activity

The Federal Reserve Bank of Philadelphia reported Thursday that its June index of general business conditions, which covers factory activity within the bank’s district, fell to -17.1, from May’s -15.6 and April’s -24.9. This data came in softer than the -11 reading expected, and continues to indicate a contraction of manufacturing activity.

Forex Trading

The retreat of oil prices from above $138 to around $135 had given a slight boost to the US dollar, but dollar gains are capped by the soft Philly Fed manufacturing data. Consolidation is likely to take place into the weekend. EUR/USD rose to a high of 1.5585 before falling back below 1.5500. 1.5420-30 is the nearest support. USD/CHF’s nearest resistance levels are around 1.0490, 1.0520-30. GBP/USD rose to the highest in more than a week to 1.9725. Next bull targets are 1.9750, 1.9770-80, 1.9800.

Economic Calendar For Friday:

German PPI 0600 GMT

Swiss producer and import price 0715 GMT

Canada retail sales 1230 GMT

Posted in Categories: Canada, Eurozone, Forex, Switzerland, UK, USA.

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