US data messy, but proves dollar positive

With retail sales, import & export price indices as well as the NY Fed manufacturing index, this morning was always going to be a noisy one for markets and investors to work their way through – and the cut through message has been modestly positive for the dollar. US retail sales were stronger in July and to top that off, June’s numbers were revised upwards. While electronics and clothing sales slipped slightly, motor vehicle sales responded to the fall in price we pointed out last week and became one of the biggest contributors to sales gains. All this equates to stronger consumption/expenditure numbers at the start of Q3, something that should show in upcoming GDP releases.

EUR/USD slumped down to 1.1688 this morning, but has since risen back above 1.17 – another signal that gains against the Eurozone currency will be hard fought for the foreseeable future. The same can’t be said for sterling however which, following a softer than expected inflation number, has sent GBP/USD below 1.29 and back to fresh one-month lows.

Has inflation peaked for UK importers? Don’t count on it

While both consumer and producer facing inflation remained relatively unchanged in the UK, hopes that the worst wave of inflation has passed may be misplaced. The cooler-than-expected rate of inflation was primarily down to one of the most volatile components: fuel prices. Fuel costs (via Brent crude oil) fell 1.3% in July alone, whereas prices for food, clothing and household goods rose. Should oil prices continue to climb across August and September (in the event of, for example, sabre-rattling in on the Korean Peninsula), we’ll likely be looking at higher, and not lower, rates of inflation to close out 2017 in Great Britain.

Our chief economist this morning pointed out that the Bank of England is not under pressure from prices to raise rates at the moment, and will not be by the end of the year. That could all change if sterling continues its recent decline against the euro however.

The rest of the day should prove relatively quiet, but sterling watchers will be carefully watching the UK unemployment report due overnight to see if the trail of negative real wage growth extends into another month. Barring that, markets will be prepping their thoughts for the FOMC minutes due tomorrow afternoon.