The Pound strengthened on the news that UK Retail Sales figures beat expectations by a modest 0.3%. The outlook for British consumers is expected to be “highly challenging over the later months of the year,” according to Howard Archer, the EY ITEM club’s chief economic adviser. He notes that inflation will near 3% through the end of the year with earnings growth expected to stay near 2%.

The Euro exhausted recent gains against the US Dollar after it had climbed to a 2½ year high, yesterday. The Euro has also weakened against the Pound, although today’s EU Trade report indicated that the EU’s trade surplus is at a six-month high.

Pound Sterling – UK Markets

Today, the Pound gained 0.38% against the Euro, after the release of better than expected UK Retails Sales figures. The exchange rate was set at €1.09. Sterling held steady against the US Dollar, with the exchange rate staying at $1.28.

The UK’s Retail Sales, like yesterday’s Employment reports, have come in better that expected. However, consumers are still cautious about making large purchases, given the uncertainties of Brexit. It’s likely that inflation will stop rising in 2018, however growth in earnings isn’t expected to rise, so consumers will have less to spend.

The British Chambers of Commerce (BCC) reported a drop in UK exporters’ confidence about their future profits ahead of Brexit. Exporters are currently benefitting from the weak Pound and continued access to the single market but they are concerned about inflation and the exchange rate. Commenting on the survey of over 3,500 businesses, BCC’s director general said, “Many manufacturers are capitalising on the advantages the fall in Sterling has brought to overseas sellers since the EU referendum. That said, exporters also tend to import raw materials and product components and are concerned that the sustained depreciation of the Pound may erode profits.”

US Dollar – US Markets

The US Dollar dropped after the release of the US Federal Open Market Committee (FOMC) minutes indicated that policymakers are wary of calling for an interest rate hike until inflation rises. The US central bank has been unable to reach their target rate of 2% for the past five years, and July’s rate was at 1.7% which is below the expected 1.8%.

Their meeting notes showed an interest rate hike in December is less likely due to indecision about whether or not to wait for inflation to pick up. The FOMC is still expected to begin reducing its $4.2 trillion portfolio of bonds in September, however.

The data from the US has been somewhat lacklustre. Yesterday’s release of July’s building permits and new housing starts came in lower than had been expected. July’s month-on-month housing starts dropped to -4.8%, far below the 0.5% that had been anticipated after June’s growth rate of 8.3%.

Euro – European Markets

The Euro dropped against the US Dollar with the exchange rate set at $1.17. The Euro is recovering from its lowest level in nearly three weeks after falling to $1.16 yesterday, when it was reported that Mario Draghi, the European Central Bank President, will not be presenting a new policy message at the US Federal Reserve’s Jackson Hole conference on 25 August. The common currency has been strengthening against the Pound since April, due to market speculation that the UK economy will be hit harder by Brexit than the Eurozone will be.

The Eurozone’s Consumer Price Index release shows that inflation rose slightly, by 1.3% in June, which was less than the European Central Bank’s target of 2%, but better than the expected increase of 1.2%. The EU’s July Trade Balance figures beat expectations of hitting €22.9 billion, coming in instead at €26.6 billion, showing a six-month high for trade surplus.

The French unemployment rate fell to 9.5% in the second quarter of this year from a previous rate of 9.6%, marking the lowest jobless rate in five years. The employment rate rose to 65.3%, which is the best figure for employment since 1980. The activity rate, which is the ratio of the labour force in the population of working age, came in at 72%, the highest level seen since 1975.

Other Currencies – Highlights

The Pound continued to drop against the Australian Dollar, trading 0.19 % lower at 1.62 AUD. This is at the lowest levels since late July, in spite of the UK’s strong employment data release. The expectation is that UK unemployment can fall further without wages rising, which would not increase the chances of the Bank of England increasing interest rates in the near future. The Australian Dollar benefitted from the US Dollar weakening, rising by 1.4%, a gain of more than one US cent.

Sterling dropped 0.03% against the New Zealand Dollar, trading at 1.76 NZD. The Kiwi picked up strength against the weakened US Dollar, with the exchange rate up to 1.367, following the US’s FOMC release. The New Zealand Dollar’s strength wasn’t changed by the release of the producer prices index which showed that producers’ profit margins are being squeezed by increases in the prices of electricity and gas. The rising prices for beef, lamb and dairy aren’t keeping pace with electricity costs. A dry winter, causing low hydro-lake levels coinciding with a higher demand for power, was blamed for the spike in wholesale electricity prices

The Pound lost a little ground against the Brazilian Real, trading at 4.06 BRL. Brazil’s government has delayed budget targets for all years through 2020 after lawmakers refused to raise taxes during the recession. The announcement came weeks earlier than had been expected, but it did not surprise investors who have seen Brazil fail to hit deficit goals for years. The 2019 deficit target is 139 billion Reais, which was previously 65 billion Reais.