Good morning.

Retail sales overlooked as markets focus on next week’s budget

Yesterday’s retail sales figures showed significant promise: year-on-year sales grew by 7.4%, the most rapid pace for 30 months. Such data is strong evidence that the consumer is yet to blink after the uncertainty of the EU referendum. Nonetheless, the pound failed to benefit from the strong figures – the close proximity to next week’s autumn statement and continued criticism of Theresa May’s handling of the plans for Brexit have kept a lid on the UK currency. At present, the GBP/USD rate remains toward the lower end of the recent range, but comfortably above post-Brexit lows. Hammond’s budget next week will likely be the next risk event for the pound, just as reports claim the UK is facing a hole in its budget of £100 billion as a result of the decision to leave the European Union. Should these forecasts prove realistic, that leaves the Treasury with relatively little wiggle room to expand government spending and pile funds into infrastructure. What’s more likely are tweaks and changes to taxes: from a cut in VAT to stamp duty changes in order to stimulate the UK economy.

Yellen testimony cements expectations of a rate hike in December

Yesterday, Janet Yellen testified to US congress on the state of the economy and gave her clearest signal yet that a rate hike is forthcoming in December. Yellen’s hints toward tighter monetary policy boosted the dollar in the afternoon, and the markets have cemented their belief that rates of 0.75% are forthcoming. Should the Fed follow through with this promise, it’s likely the dollar will continue its recent rally, pushing the USD index toward levels not seen since the early 2000s, and marking the strongest greenback for decades.

Trump’s career of international diplomacy begins

The persistent strength of the dollar will have been a talking point between President-elect Donald Trump and Japanese PM Shinzo Abe at their meeting yesterday (the first meeting between Trump and a foreign leader), which appears to have been a resounding success. Abe has commented since on Trump’s trustworthiness and ability to manage the US, but it’s likely he remains concerned about Trump’s inclination to ditch the Trans-Pacific Partnership trade agreement – a deal that would cement Japan’s place as a global export power.

Today’s calendar is fortunately quieter than the rest of the week has been, however comments from the ECB President Draghi at 0830 GMT will be closely watched for any further hints that the ECB are considering revising their bond-buying plan to resemble something closer to the Japanese model.

Have a great weekend.