26/07/2024
Written by: Ian Morley
Summary
As outlined in the report from yesterday, the markets started the day on a more stable note, carrying this trend into Thursday’s trading session. Equities saw an upward trajectory, supporting the GBP’s gains, particularly against the Euro. GBPEUR appears poised to challenge the highs recorded in December. Notably, US initial jobless claims were lower, signalling an improvement in the job market and causing 10-year treasury yields to rise to 4.14%, the highest since mid-December. The USD rebounded from earlier losses.
Speeches:
· USD: Speeches by Fed representatives Goolsbee, Daly, and Barr.
Our Analysis
UK retail sales this morning experienced their sharpest decline in three years, heightening concerns of a potential recession in the latter half of 2023. The reported -3.2% figure, compared to an expected -0.5%, implies a 0.9% drop in sales for Q4 2023, impacting the GDP by 0.04% in the same period. Coupled with the surprise inflation increase in December, this creates a challenging scenario for the Bank of England (BoE), grappling with sluggish growth amid persistent inflation. Although market expectations for a rate cut still point to May, ongoing data reinforcing stagflation concerns might prompt an earlier adjustment, negatively affecting the GBP, which is already showing losses this Friday morning.
The USD is on track for its third consecutive weekly gain as the market reduces expectations of rate cuts this year, resulting in higher treasury yields. Positive sentiment from the University of Michigan and resistance to rate cuts from Fed speakers are likely to contribute to further USD strength.
GBP’s positive momentum this week suffered a setback after the rapid decline in UK retail sales, indicating a potential recession in the previous year. The BoE now faces the challenge of managing a struggling economy alongside persistent inflation. With markets forward-looking, close attention will be paid to additional data points to assess the growing threat of stagflation. In an election year, this situation presents challenges for PM Rishi Sunak and poses risks for importers exchanging GBP for foreign currency.