Sterling held steady as UK re-opening optimism offset reservations over coronavirus variants.

US retail sales data was weaker than expected, although March data was revised higher. US yields moved lower on the day which helped underpin risk assets.

Renewed confidence in an accommodative Fed stance underpinned Wall Street with net gains, despite a longer-term inflation focus. Global equities overall posted gains, although risk conditions were more cautious in Asia. Lower yields again undermined the dollar, but the US currency recovered slightly from intra-day lows.

EUR/USD posted net gains, but hit selling interest near 1.2150. Sterling held steady as UK re-opening optimism offset reservations over coronavirus variants. Commodity currencies were boosted by the weaker US dollar, but pared gain in Asia.

The Euro held a firm tone into Friday’s New York open with the single currency gaining some support from expectations that the Euro-zone outlook was improving. A stronger vaccination rate should be an important element in allowing an easing of restrictions and a stronger recovery.

Headline US retail sales were unchanged for April, below expectations of a 1.0% increase, but the March surge was revised higher to 10.7% from the original reading of 9.7%. Underlying sales declined 0.8% on the month compared with expectations of a 0.7% gain and following a 9.0% gain previously.

The control group recorded a 1.5% decline following a 7.6% gain the previous month. The dollar was unable to gain any significant support from the retail sales data with fresh doubts following underlying demand conditions following the much weaker than expected employment report released earlier in May.

The University of Michigan consumer confidence index declined to 82.8 for May from 88.3 previously and below consensus forecasts of 90.0 with a decline in the current conditions and expectations components. There was a surge in the 1-year inflation expectations index to 4.6% from 3.4% previously with the 5-year rate at 3.1% from 2.7% and inflation developments will remain a crucial market factor in the short term.

Cleveland Fed President Mester stated that the central bank is really focussed on inflation expectations at present. She saw inflation at 2% this year and heading lower again next year.  The dollar remained on the defensive and EUR/USD strengthened to highs around 1.2140.

CFTC data recorded a net increase in short, non-commercial dollar positons for the week, maintaining the potential for short covering. The dollar gained an element of respite on Monday with a slightly more cautious tone surrounding risk curbing selling pressure and EUR/USD traded around 1.2130 at the European open.

US Treasuries strengthened following the US retail sales data with the 10-year yield just below the 1.65% level while the 5-year yield was held around 0.82%. The dollar tended to drift weaker as yields moved lower, although the impact was limited as the yen also lost some support amid renewed gains in equity markets. Overall, USD/JPY dipped to the 109.30 area at the New York close with both currencies unable to secure sustained support.

Annual growth in Chinese industrial production slowed to 9.8% for April from 14.1% the previous month and retail sales were also notably below expectations with an annual increase of 17.7%. Chinese officials expressed some caution over fundamentals which also hampered overall risk appetite.

There were also reservations over regional coronavirus trends with increased cases and restrictions in Singapore and Taiwan. Regional equity markets were mixed with losses for Japan offset by gains in China and USD/JPY posted a limited net gain to 109.35 after hitting selling interest close to 109.50.

Overall Sterling moves were influenced more strongly by global developments on Friday with a lack of domestic data. There were, however, some reservations over the Indian coronavirus variant in the UK which continued to spark some speculation that there could be a delay to the UK re-opening measures due in June.

In this context, there was some caution ahead of a news conference by Prime Minister Johnson after the European close.

CFTC data recorded a net increase in long Sterling positions to 28,000 contacts in the latest week, maintaining the risk of a correction if confidence dips. Reservations surrounding the Indian variant continued over the weekend, but with some relief that vaccines were still seen as effective.

Risk conditions were slightly more cautious on Monday, but housing data remained strong with further evidence of tight labour markets. GBP/USD traded just below 1.4100 as the US currency stabilised with GBP/EUR holding just above 1.1600 as markets continued to monitor coronavirus variants.

Economic Calendar

07:30CHF PPI (M/M)(APR)0.60%
07:30CHF PPI (Y/Y)(APR)-0.20%
10:00CPI (EU Norm) Prelim YY(APR)0.80%1.10%
10:00CPI (EU Norm) Prelim MM(APR)0.40%
10:00CPI (EU Norm) Final YY*(APR)0.60%1.00%
10:00CPI (EU Norm) Final MM*(APR)0.90%
13:15CAD Housing Starts(APR)335.2K
13:30NY Empire State Manufacturing Index(MAY)26.3
13:30CAD Foreign Securities Purchase(MAR)8.52B
21:00USD TIC Net Long-Term(MAR)4.2B

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.