The Pound rallied against the US Dollar earlier today, due to improved optimism about Brexit transition period negotiations. Sterling lost some strength after the Office for National Statistics (ONS) report showed January retail sales figures came in much weaker than had been expected. For the three months to January, sales increased by just 0.1%, which the ONS said could be “partly attributed to a background of rising prices.”

The US Dollar is weakened partly due to investors’ concerns that the US economy may be overheating, or completing a cyclical upturn with a slowdown due to begin ahead. Inflation is accelerating, as was seen in yesterday’s Producer Price Indices, while industrial production is down. Another factor that is weighing on the Dollar is the long-term impact of the deficit that will be created by borrowing to cut taxes for companies in the US budget.

Pound Sterling – UK Markets

The Pound has slipped against the US Dollar, with the exchange rate at $1.40. Sterling is slightly lower against the Euro, exchanging at €1.12.

Today’s UK Retail Sales figures for January were expected to show a rebound up to 0.5% month-on-month in January sales, after the 1.5% decline in December. However, retail sales volumes only rose by 0.1% month-on-month. Higher food store prices caused a decline for the sixth consecutive month of food purchases which fell by 0.9%. Year-on-year growth was 1.6%, much lower than the expected increase to 2.6%.

Brexit nervousness is subsiding slightly following developments that clarify the UK’s trade stance. The UK intends to keep financial rules aligned with the EU after Brexit, favouring a mutual recognition of regulations to preserve the City of London’s access to the EU. Also, the fact that the EU has removed a transition clause that was seen to be punitive by the UK increases the odds of a transition deal being agreed.

Activity in the UK construction sector slowed in January, according to Barbour ABI, which provides construction industry data. The value of new contracts awarded in January, at £5.4billion, was 10.6% lower than the value of those awarded a year earlier. Barbour ABI lead economist, Michael Dall noted that a lack of major projects held construction back in January.

US Dollar – US Markets

The Euro is steady against the US Dollar, exchanging at $1.24. The US Dollar Index (DXY), which measures the strength of the Dollar against six major competitor currencies, is down, at 88.55.

US inflation is building faster than expected, with factories raising their prices again last month. January’s wholesale inflation rose to a nearly six-year high, according to yesterday’s Producer Price Index (PPI). Prices shot up by 0.4% due to higher costs for petrol, wholesale goods and healthcare services. On an annual basis, PPI prices increased by 2.7%, up from December’s reading of 2.6%.

Industrial Production slipped further than the expected decline to 0.2%, from December’s 0.9%, which was revised down sharply. January’s output fell by a -0.1%. Capacity Utilisation also posted a lower than expected figure of 77.5% for January, rather than the increase to 78.0%. Taken together with the PPI, they raise concerns regarding stagflation, or stagnant or falling output with increased inflation.

Initial Jobless Claims for the week ending 9 February rose to 230,000 up from 223,000 that had been expected, indicating the strength of the US jobs market. Continuing Jobless Claims for the week ending 2 February rose to 1.942million. This was more than the expected decrease to 1.925million from the earlier total of 1.927million.

February’s Philadelphia Federal Manufacturing Survey far exceeded expectations of slowing from 22.2 in January to 21.1. The robust reading of 25.8 indicates improving future conditions as new orders jumped from 10.1 to a reading of 24.5. The prices paid index rose 12 points to 45 for its best reading since May 2011. The Empire State Manufacturing Survey dropped for the fourth consecutive month since it hit 28.1 in October, declining from 17.7 in January, to 13.1 in February.

Today’s US data releases feature the construction sector, with Housing Starts expected to rebound for the month of January after December’s decline by 8.2% marked the biggest drop in over a year. Building Permits Change will also be likely to have picked up by around 3.5% after dropping by 0.1% in December.

Euro – European Markets

The Euro has strengthened against the Pound, with the exchange rate set at £0.88.

Germany’s Wholesale Price Index shattered expectation of an increase to 0.2% up from December’s drop to -0.3%, coming in this morning at a robust 0.9%. German statistical office Destatis also reported that annual prices climbed by 2.0% in January, up from a year-on-year increase of 1.8% in December.

France’s 8.9% unemployment rate, according to yesterday’s ILO unemployment figures for the fourth quarter, is a strong decline from the previous unemployment rate of 9.6%. This marks the lowest unemployment level since 2009. Also, yesterday, Amazon announced plans to create 2,000 new jobs in France, mostly in its warehouses. The positive news follows the International Monetary Fund praising “the quality and ambition” of recent reforms made by president Emmanuel Macron.

Italy’s Global Trade Balance for December showed a surplus of €5.253billion, just slightly down from November’s figure of €5.688billion. Italy’s trade deficit with EU narrowed slightly to €-0.974billion. Italy is said to be riding a wave of Eurozone global trade growth that will probably weaken in the first quarter of 2018 due to the Euro’s strength. The Euro has gained 15% against the US Dollar over the past year, making Italian goods more expensive for American customers.

Other Currencies – Highlights

Sterling has slipped against the Australian Dollar, with the exchange rate at 1.76 AUD. Reserve Bank of Australia’s governor Philip Lowe has said that Donald Trump’s huge borrowing surge to fund company tax cuts are “very problematic,” warning that such cuts should not come at the expense of higher budget deficits.

The Pound is lower against the New Zealand Dollar, exchanging at 1.89 NZD. New Zealand’s Business Purchasing Managers Index (PMI) shows the manufacturing sector is continuing to expand with the January reading up to 55.6 from December’s PMI of 51.2.

The Pound is weaker against the Canadian Dollar exchanging at 1.75CAD. Bank of Canada deputy governor Lawrence Schembri said yesterday that Canada’s cautious approach to raising rates is the result of balancing inflation with the uncertainties of renegotiating the North American Trade Agreement.