What’s been happening?

Pound Sterling – UK Markets 

The Pound weakened further today in reaction to the latest retail sales data released by the Office for National Statistics this morning. Retail sales fell 0.5% in June, partially reversing the 1.3% increase seen in May when markets were looking for consumer spending to rise by 0.1%. The decline was mainly attributed to a fall in non-food store spending, which offset a rise in food spending associated with the football world cup. However, the June numbers follow a two-month period of strong growth for UK retailers, which saw a quarterly growth rate rise to 2.1% for the three months to the end of June, its highest level since the period ending in February 2015. The Pound was quoted at 1.3002 against the Dollar following the release, while the Pound to Euro rate plummeted to 1.1199. The Pound was also slightly lower against most other major currencies.  

Underlying Brexit concerns are continuing to weigh on the Pound exchange rates with market analysts increasingly pricing the potential for a ‘no deal’ Brexit scenario. Markets will be focusing on Brussels today where the European Union chief negotiator Michel Barnier and the new UK Secretary of State for Exiting the European Union, Dominic Raab will meet as part of ongoing Brexit negotiations. The tone adopted by the two parties during the meeting is very likely to trigger further moves in the Pound. 

US Dollar – US Markets

US construction data came in below market expectation with housing starts tumbling 12.3% to a seasonally adjusted annual rate of 1.17 million units in June from a revised 1.34 million the previous month. Building permits dropped 2.2% to a rate of 1.27 million units from 1.30 million previously. Both readings were at the lowest level since September 2017. 

The second day of Federal Reserve Chairman Powell’s testimony in front of the House Financial Services Committee was little changed from Tuesday yesterday. Powell said that the central bank has tools it can use to cushion the potential economic fallout from a trade war, although the effort could be challenging if higher tariffs push inflation up too sharply. The sentiment was echoed in the Fed’s latest Beige Book report, which noted that manufacturers in all of the Fed's districts were expressing concerns about the tariffs. The Beige Book also reported modest to moderate economic growth and prices increases overall were still contained. The Dollar held firm into today’s early trading against both Sterling and the Euro.

Euro – European Markets

Eurozone’s construction output growth improved for a third straight month after stagnation in February, according to the Eurostat’s preliminary data released yesterday. Construction output increased 1.8% year on year after a 1.2% rise in April. Civil engineering output grew 3.3% and building construction increased 1.3%. The final June Eurozone inflation reading was confirmed at 2.0% from 1.9% in May, however, there was a downward revision to 0.9% for the core rate from 1.0% in the flash reading which lowered expectations of higher inflation and maintained the potential for a dovish European Central Bank policy which hampered the Euro. 

ECB policymaker Francois Villeroy de Galhau said yesterday that the inflation outlook is less sensitive than is growth to risks currently looming over the global economy. He also noted that that emergence of protectionism was the biggest threat not only to global growth but also the US economy. When referring to potential interest rate increase in summer of 2019, Villeroy said it will all “depend on inflation data”.

What’s coming up? 

UK: Markets will be looking to the public sector net borrowing data out tomorrow morning. Uncertainty surrounding Brexit will continue adding pressure on Sterling gains, markets will look for possible GBP support from Barnier’s and Raab’s meeting in Brussels today. 

US: Continuing and initial jobless claims data will be released later today. 

EU: It looks like a data-quiet rest of the week for the Euro markets. Eurozone Markit manufacturing and services data will be out next week Tuesday.