USD

The pound took advantage against the US dollar yesterday after falling to multi-month lows last week. The move is somewhat strange as it comes off the back of a slump in global equity markets, which normally means that the dollar is used as a safe-haven in times when investor sentiment declines.

Investor sentiment declined yesterday as fears the US economy could be on track for a major slowdown. Concerns of a slowdown came after major retailer Target gave guidance that future sales were to fall sharply over the coming months. Shares for Target fell 25% on Wednesday after its management said rising costs would hit annual profits. This echoed a recent warning from its rival Walmart. The warnings from Target and Walmart sent markets lower as fallen consumer confidence could lead to a consumer driven recession.

Existing home sales also released yesterday showed a decline of 2.4% which is the third straight decline in sales as mortgage demand drops. This is a sign that interest rate hikes from the Federal Reserve are starting to be felt within the US economy and that further hikes will continue to cool the market.

US unemployment claims rose sharply to 218k, up from 197k on the previous month.

USD fell as much as 1.30% against GBP after the data releases.

GBP

Supported by hopes that British Chancellor Rishi Sunak will act to help families and businesses sooner rather than later and not wait for the Autumn Budget, the pound held firm against the euro and gained against the dollar. Calls for the Chancellor to help the British public with rising costs came after the level of inflation had reached a forty-year high of 9%. There have been rumours that he will look to cut tax for both individuals and businesses which would go some way to lifting the burden on the UK purse strings.

This morning we have already had data release for UK consumer confidence which has fallen to its lowest level since 1974. Research company GfK’s UK consumer confidence index fell two percentage points to minus forty in May, its lowest level since records began and beating the previous record set in the financial crisis.

Whilst this paints a very poor picture for the UK economy there was also some positive news from this morning UK data releases. UK retail sales have risen unexpectedly. Sales volumes across the UK rose by 1.4% in April, following a fall of 1.2% in March, the Office for National Statistics reports – better than the 0.2% fall economists had expected. The recovery was driven by a rise in food store sales volumes up 2.8%, due to higher spending on alcohol and tobacco in supermarkets (supermarket food sales were broadly unchanged). Clothing also saw a jump in sales as the people prepare for summer holidays which helped to lift online sales. Fuel sales rose 1.4% after a 4.2% fall in March when record increases impacted sales.

Although this all appears positive, the overall picture is still weak as this quarter’s sales volumes are still 0.3% lower when compared with the previous quarter. The downward trend since the summer of 2021 continues as rising inflation keeps hitting disposable income. The figures will raise concern about the Bank of England’s ability to raise interest rates without sending the country into recession. MPC member Pill’s speech this morning could shed some light on what the BoE will do going forward.

Key announcements

07:00 – GBP – UK Retail sales – released 1.4% forecast -0.3%
08:30 – GBP – MPC member Pill speaks