Sterling and the euro were consistently stuck in the same 2 cent channel for the past month, as if cautiously watching the dollar and stock market dramatics from the sidelines. That pattern was broken today when the pound plummeted, immediately losing half a cent to the dollar on the shock of the unexpected fall in UK retail sales.

Across the Atlantic, a series of excellent US reports including the construction sector, newly unemployed figures and manufacturing sentiment gave the dollar a boost. In President Trump’s first press conference he took credit for the stock market rally and hit out at the media, adding to the market jitters that ultimately led to the dollar’s biggest drop in 2 weeks.

Pound Sterling – UK Markets

Given the impact this week’s inflation report had on the pound, today’s unexpectedly dismal retail sales figures provided further unwelcome pressure. For the third month in a row, sales have been disappointing, and January’s volume of online sales, which was expected to rebound, instead shrank by 0.3%. It’s now crystal clear that rising prices are cutting into consumer spending as retail sales fell by 0.4% over the last quarter, compared to the previous months, marking the first such decrease since December of 2013.

The Office for National Statistics (ONS) annual Family Spending Survey was analysed by Equality Trust who reported deep inequality in the nation’s spending habits, raising questions about real economic recovery from the global financial crisis. The wealthiest 10% spend more on wine (an average of £468) than the poorest 10% spend on their water bills (£379) each year. Average weekly households spent the same (£529, excluding mortgage payments) as last year, but this is less than the £555 average 10 years ago.

US Dollar – US Markets

The dollar strengthened against the pound yesterday on the release of strong market data, then it made an abrupt U-turn in response to political uncertainty under the unorthodox new administration. Continued instability is likely ahead as the market becomes impatient for a concrete fiscal plan from the ‘tweeter in-chief’, President Trump. Amongst a series of positive reports from the US was yesterday’s Initial Jobless Claims which came in at 239k under the forecasted 245k for the week ending 10 February. This was marred by higher than anticipated Continuing Jobless Claims showed 2.076 million Americans struggle to find work. The rest of the data points were positive, uniformly exceeding expectation. A construction boom is on the cards, as the number of permits to build houses hit a 14-month high.

Factories in the Philadelphia rustbelt region are expanding at their fastest pace in 30 years, according to research from the Federal Reserve Bank of Philadelphia. They report a January surge of 43.3 - the best reading since 1984, with newly added orders showing a much better than expected demand for goods. After a December reading of 23.3, growth was anticipated to drop off to 18.0. In defence of Trump’s anti-immigration policies, businesses across the US were shuttered for ‘a day without immigrants’, a widespread protest to show the economic disruption the US faces without immigrants working or attending schools.

Euro – European Markets

The euro is having its best day of the year against the US dollar this morning, due to the dollar’s volatility. Today the economic calendar’s key event is the Eurozone G20 foreign ministers meeting, which will focus on the Greek debt crisis. A report by Macquarie Research warned that increasing interest rates and exchange rates in Italy pose the largest threat to the Eurozone and that Germany must reduce its surpluses and spur consumption to allow less affluent southern members including Italy and Greece to improve. The report warns that re-emerging deep fractures must be resolved since they set the Eurozone on course for failure.

The European Central Bank’s (ECB) Mario Draghi ECB reported the profits made buying government bonds rose €110m to €1.19bn bringing its balance sheet up to €3.7tr. The central bank had expanded its bond-buying programme to ward off deflation, with purchases reaching €1.65tr by the end of last year. Increased interest rate income brought ECB’s total interest income to €1.6bn, an increase of 11%. The ECB shares its profits with the 19 national central banks that make up the single currency. In yesterday’s ECB policy minutes, the central bank opted to continue with the present stimulus ahead of this year’s numerous European elections, indicating stability was best at present.

Other Currencies – Highlights

The New Zealand dollar benefitted from the UK and US inflation reports, rising after the US’s stronger than expected inflation figures were released. This proved fleeting as it reversed its gains to the dollar on the release of yesterday’s strong US data. It slipped the first week of February when the Reserve Bank of New Zealand unexpectedly revised its inflation forecast, in a move calculated to curb Kiwi’s recent strength and keep the country’s exports competitive.

Yesterday’s release of New Zealand’s modest gains in Retail Sales sent the Kiwi on a downward flight path. Although the figures were fairly respectable, especially in terms of car sales, they demonstrate restraint in household spending, keeping consumer growth checked, which is better for the economy in the long term.

This has been a volatile week for Kiwi, opening with a rise from a 4-month low against the Australian dollar, having attracted bargain hunter investors after it fell in an earlier sell off. This has led to the pound gaining 37% to the New Zealand dollar this morning after Sterling gained 33% on Kiwi for the week.