Weak Retail sales and Benign Inflation pressure FOMC

Following last week’s slightly more dovish comments from Fed Chair Janet Yellen during her biannual testimony to congress economic data seemed to back her views.

Retail sales had been weak in May and were expected to rebound in June. The May number was revised from -0.3% to -.01% but June was still weak registering a fall of 0.2%. In a comparable manner to the U.K. the consumer had, until recently, been a cornerstone of economic recovery so any weakness brings a major concern.

Inflation has been well controlled in the U.S. and June’s data continued that view. Consumer prices rose by just 1.6% in June disappointing those looking for a rate hike in the Autumn. Inflation has barely been a factor in the U.S. remaining well below the Administration’s 2% target.

There are calls for the tapering of the FOMC’s bond purchases that have seen the Fed’s balance sheet blow out to $4.5trn. It is impossible to know how successful the quantitative easing programme was since there is no way of knowing the outcome had it not happened but it’s outcome has seen the global economy survive and start to see positive growth.

Sterling rises and Brexit talks resume

The main beneficiary of the dollar’s fall on Friday was the pound. Sterling rose by over 1% against a weakening dollar and by 0.5% against a Euro that was unable to break strong resistance.

If the pound is now able to consolidate above 1.3000, it will be a considerable aid to the continuing fight against inflation. This week’s sees inflation figures released on the U.K. Following last week’s employment report which saw real wages again contract, a read of over 3% for the Consumer Price Index will add to calls for a rate hike at next month’s MPC meeting.

Two external members of the MPC; Ian McCafferty and Michael Saunders are now confirmed hawks and the Chief Economist is leaning towards a hike according to recent statements. There is a new member joining at the next meeting. Silvana Tenreyro has, so far, managed to stay out of the limelight so her voting intentions are unclear. The final independent member, Dr. Gertjan Vlieghe, has been making “dovish” noises recently.

The three other BoE officials who sit on the MPC, the Governor and his two deputies present a united front and, so far, lean towards continued loose monetary policy.

Euro unable to make much headway

As already mentioned, the single currency fell on Friday despite weak data from the U.S. Its recent rise had seen it develop an overbought condition and several “weak longs” needed to be removed before fresh progress could be seen. The fall on Friday was shallow and entirely technical leaving an upside move this week a major possibility.

This week’s ECB Monetary Governing Council Meeting will be anticipated as there is a possibility that President, Mario Draghi will outline plans for the withdrawal of the stimulus that was put in place during the financial crisis. St. Draghi has already made clear his views on tightening policy by raising rates but tapering of the “extraordinary measures” is likely to start soon.

The pound has pulled back from the 0.9000 level that looked likely to be threatened last week and the rate will be affected largely by the Brexit talks which get under way following last month’s largely ceremonial opening.

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Alan is a highly experienced banker with an in depth knowledge of Corporate Banking, Treasury and Trade Finance. He has had a varied career in Global markets, Risk management, FX Trading and Sales & Interest Rate Management. He has managed sales teams mentoring his team in both markets and marketing.He has been published in a number of journals and has appeared daily on radio to discuss market movements and events. His first novel was recently published.