Sterling forex rates increases

UK Retail sales came in above expectations for September, yesterday morning, led by a strong increase in food store shopping. Retail sales increased 0.7% from August and up 0.7% from September 2004.

Expectations were for an increase of 0.3%. August’s figure was also revised upward to 0.2% on the month and 0.1% for the year. Sterling took heart from these numbers and has continued it’s upward momentum this morning.

September’s positive retail sales number was a welcome respite after the weakness of the July and August numbers and last months report from the Confederation of British Industry, which reported the pace of UK retail sales fell to its lowest point in the 22-year history of its survey.

Elsewhere, the dollar ended the session weaker and has continued to weaken in overnight trading as The Federal Reserve Bank of Philadelphia’s business conditions index showed a strong but inflationary recovery and continued deterioration in the leading indicator of economic indices (-0.7% for Dec following a revised -0.1% prior).

A key release today will be the UK GDP first estimate for Q3 at 9.30am. The figure is expected to come in below trend at 0.4% for the quarter, which compares with 0.5% last time, making for an unchanged y-o-y rate of 1.5% and the fifth consecutive quarter of sub-trend growth.

This is an important number following the recent downward revisions that made Q2 GDP the weakest in twelve years.

Bank of England holds steady

The Bank of England minutes were released at 9.30 yesterday morning and showed all nine members of the MPC voted to keep interest rates on hold at 4.5% this month.

The minutes also revealed that the MPC did not even discuss the possibility of a rate cut, but were clearly worried about the impact of high oil prices.

As a result sterling strengthened as expectations for a rate cut before the year-end were scaled back but the pound does look to be on shaky ground as the argument for growth versus inflation rages.

Sterling has fallen almost 9% against the dollar this year with the fall being exacerbated by the BoE rate cut in August.

This morning at 9.30am in the UK we have the release of Retail Sales for September. Last months figure was very disappointing, coming in at 0.0% change versus the previous month, which was also a disappointing number. Expectations today are for a rise by 0.3% month on month and 0.20% on the year.

Bank of England's minutes eagerly awaited

In the UK, eyes are focused on the release of the MPC minutes at 9.30am. The market will be looking to see whether the MPC is split between growth concerns and rising inflation.

Expectations are for 9-0 in favour of keeping rates on hold for the second month running after the committee was split 5-4 on its decision to cut rates in August. Yesterday’s CPI data showed annual inflation rising to 2.5% year on year.

This figure was slightly worse than forecast but possibly better than some feared after comments from Rachel Lomax on Monday about rising inflation and sluggish growth.

The US dollar has continued to strengthen across the board this morning, with USDJPY moving to within a whisker of 116 and EURUSD breaking through the 1.19 handle. Treasury International Capital (TICs) flows data released yesterday showed foreign investors appetite for US assets rising from $87.5bn in July to $91.3bn in August, which was significantly better than expectations.

Also released in the US yesterday, both headline and core Producer Prices rose more than expected and suggested inflationary pressures will increase.

The Oil price continued to fall this morning as the path of Hurricane Wilma is expected to miss oilrigs and refineries on the Gulf Coast.

Traders were concerned that Wilma could delay recovering US output ahead of the winter demand in the northern hemisphere. US crude was down $62.71 a barrel this morning falling since late August’s record-high of $70.85.

Dollar soars versus the Yen on money flows

The US dollar moved to a 2 year high against the Yen this morning as Japanese investors continue to buy dollars to invest in higher yielding debt.

The dollar was also firmer against the euro and sterling as the market continues to see the FOMC raising rates. Although hawkish comments yesterday from European Central Bank Chief Economist, Otmar Issing, has increased speculation that the ECB may also be looking at a rate hike.

Oil prices were also boosted by concern over Tropical Storm Wilma in the Gulf of Mexico, which could be declared a hurricane later today.

Rachel Lomax, Deputy Governor of the Bank of England said there would be tough choices facing central bankers in the coming months. Steady growth and low inflation over the past decade may have encouraged an unrealistic idea of what central banks can do to keep an economy on track while the current dilemma of sluggish growth and rising inflation raises it’s ugly head.

Ms. Lomax, who with Governor Mervyn King opposed the BoE’s August rate cut said there was a great deal of uncertainty about what oil prices would do but a series of oil shocks could push up inflation for an uncomfortably long period. All eyes this morning to the release of CPI at 9.30am. Expectations are 2.70% yoy.

House prices in the UK fell at their slowest pace for over a year according to the Royal Institution of Chartered Surveyors (RICS). The RICS survey also expected house prices to rise in the next 3 months. RICS said the BoE’s August rate cut to 4.5% had boosted confidence in the property market, but cautioned the pace of recovery was only gradual.

The Canadian dollar moved higher yesterday, helped by rising oil prices and expectations that the Bank of Canada will raise interest rates today.

Although US interest rates have risen at a more rapid pace this year the CAD’s exposure to commodity prices, particularly oil, has given the Canadian dollar the strength to move to 14-year highs late last month.

US Dollar retreats after inflation data

The dollar retreated sharply from multi-month highs against the leading currencies on Friday as US inflation rate hit a 14-year high which dampened speculation of aggressive US interest rate rises.

Worldwide concerns about inflation were stoked by official figures showing US prices rising at their fastest rate for 14 years and warnings from European central bankers about wage increases

The US dollar had a roller coaster ride Friday moving from highs of 1.1975 (against the EUR) to lows of 1.2108 as a mixed bad of inflation data and a much weaker than expected Michigan Sentiment Index changed the dollar’s bullish direction.

Sterling also benefited from the economic releases in the US, gaining from a low of 1.7481 to highs of 1.7684.

US CPI in September rose much higher than expected to +1.2% but the Core number which strips out food and energy prices came in below expectations at +0.1%. The University of Michigan Consumer Sentiment survey fell to 75.4 in October, which was a lot worse than market expectations of 80.0.

Industrial production in the US for September came in at –1.3% against market expectations of a fall of –0.4%. The dollar continued its decline this morning in the Far-East moving further away from last weeks two year high of 115.09.

This morning property website Rightmove said house prices in the UK rose by 0.5% (Sept 11th to Oct 8th) the first time since April it has recorded a monthly price rise. The average asking price for a property rose to GBP 196,348 from GBP 195,407 in the last survey. Over 100,000 new properties came onto the market during the period.