Good morning

Another stellar day for sterling as retail sales crush expectations

After one of the strongest days in months on Wednesday, sterling benefitted further yesterday as retail sales firmly beat expectations. Monthly sales volumes were up 1.3% (over double the median analyst expectations) as falling prices, the introduction of the National Living Wage and the end of poor winter weather boosted sentiment on the high street.

The dual effect of opinion polls favouring ‘remain’ in the EU referendum and the apparent return of the UK consumer have buoyed sterling over the past two days, rising 1.3% against the US dollar and almost 2% against the euro. This means there has been a rally in sterling of 5% from 2016s low, calling into question how much further it can rally should the remain camp emerge victorious on June 24th.

Equity markets set to suffer as Fed looks ever closer at June

Since the release of the Fed minutes on Wednesday we’ve seen a number of Fed speakersreiterate the recent message: rate hikes are coming and the market isn’t prepared for it. Fed’s Dudley yesterday stated that a rate rise in either June or July this year would likely be appropriate (repeating that this is dependent on data) and that he remains “surprised” on the market’s perception of a Fed’s tightening cycle.

At present, markets are pricing in a 30% probability of a rate hike in June and a 52% chance in July (and even a 9.3% chance of a rate hike at both!), which leaves the US dollar with a lot of room to run should the Fed actually follow through on their recent communication. Markets have begun to adjust though, equity markets in the US have stalled, with the benchmark S&P 500 falling into negative territory for the year and the Dollar Index (a measure of the dollar’s value against a basket of currencies) marching higher.

German producer inflation shows the battle is far from over for the ECB

This morning’s German producer price inflation dipped below expectations, with the yearly index falling by 3.1%. This significant deflationary pressure on factory gate prices comes despite the ECB reaching the self-imposed target of a balance sheet amounting to three trillion euros as part of the central bank’s stimulus program. With stiff price competition from emerging markets and rock-bottom oil prices, one wonders how much worse the situation would have been had Mario Draghi and the ECB board not taken these steps.

Quieter end to the week with little on the data calendar

Today’s schedule is slightly more sparse when compared to the rest of this week, with Canadian inflation figures due at 13:30 UK time the highlight of the day.

Have a great weekend.