US retail sales data was stronger than expected which boosted confidence in the US outlook.

US retail sales data was stronger than expected which boosted confidence in the US outlook. US bond yields moved higher following the data with a 3-week high for the 10-year yield.

Wall Street equities posted gains despite higher yields with optimism over earnings. Asian equities, however, had a negative bias on earnings reservations.

The dollar posted further gains to a fresh 16-month high on yield grounds. The Euro remained vulnerable on dovish ECB expectations, especially with coronavirus reservations. EUR/USD retreated further to 16-month lows near 1.1260 before a tentative recovery. The yen remained under pressure with USD/JPY at the highest level for over four years near 115.00.

Sterling posted net gains on increased speculation over a Bank of England rate hike after strong inflation data with GBP/EUR at 20-month lows. Commodity currencies were dragged lower by the strong dollar.

The Euro was unable to secure a significant recovery ahead of Tuesday’s New York open with expectations of a very dovish ECB policy continuing to sap underlying support. On-going concerns surrounding coronavirus tends and renewed upward pressure on gas prices also undermined confidence.

Headline US retail sales increased 1.7% for October, above consensus forecasts of 1.2% and there was a marginal upward revision for September to 0.8% from 0.7%.

There was a 1.8% increase for auto sales on the month with a strong 3.8% increase in electronics goods.

Underlying sales increased 1.7% for the month, also above market expectations of 1.0% while there was a 1.6% monthly increase in the control group. The data boosted confidence in the outlook, especially as it tended to ease potential worries triggered by the sustained decline in consumer confidence, although sales will be boosted by higher prices. Import prices increased 1.2% for October with a 10.7% increase over the year as fuel price imports posted an annual increase of close to 87%.

The dollar secured a net advance following the data and maintained traction into the European close to post a fresh 16-month high. Commodity currencies lost ground and EUR/USD retreated to fresh 16-month lows around 1.1320. The dollar strengthened further in Asia on Wednesday with EUR/USD sliding to fresh 16-month lows around 1.1265 before a recovery to around 1.1300 with central bank policy trends remaining a key market focus.

There was a stronger than expected rebound of 1.6% in US industrial production  after a 1.3% decline the previous month with a strong rebound in capacity use.

The NAHB housing index strengthened to 83 for October from 80 the previous month, maintaining confidence in the construction sector.

Treasury Secretary Yellen stated that inflation might subside by the second half of 2022, although the underlying tone was significantly less confident than previously. Inflation developments continued to have a significant impact on the political debate with pressure for the Administration to take action.

Markets continued to monitor any announcement on whether Fed Chair Powell would be nominated for a second term.  The yen was unable to make any headway on the crosses and USD/JPY posted a solid net advance to around 114.65 at the European close as the 10-year yield held close to 3-week highs.

San Francisco Fed President Daly maintained a dovish tone with comments that patience is the best action and that it is better to wait for greater clarity rather than raise rates pre-emptively. She added that raising rates now would not fix high inflation but would slow the recovery.

Asian equities were again mixed amid reservations surrounding the Chinese outlook while USD/JPY advanced to a 56-month high near the 115.00 level.

Sterling continued to make headway in European trading on Tuesday with confidence underpinned by the latest labour-market data. The data overall suggested that the labour market had tightened further and, given that the Bank of England had wanted evidence of labour-market strength before sanctioning an increase in interest rates, there were increased expectations that the central bank would move to tighten in December.

Domestic yields increased which provided net support for the UK currency and overall risk appetite held steady which helped underpin sentiment.

GBP/USD was unable to hold above 1.3450 given the strong dollar and drifted lower as the US currency posted further net gains, but there were notable advances on the main crosses.

The latest UK CPI inflation data recorded a sharp increase in the headline rate to 4.2% from 3.1% previously and above consensus forecasts of 3.9%. This was the strongest reading since the beginning of 2012 and the core rate also increased to 3.4% from 2.9%.

The data increased expectations that the Bank of England would raise rates at the December meeting.

Economic Calendar

07:00GBP Core CPI (Y/Y)(OCT)3.00%2.90%
07:00GBP CPI (Y/Y)(OCT)3.10%
07:00GBP CPI (M/M)(OCT)0.30%
07:00GBP PPI Input (Y/Y)(OCT)11.40%
07:00GBP PPI Input (M/M)(OCT1.10%0.40%
07:00GBP PPI Output (Y/Y)(OCT)7.30%6.70%
07:00GBP PPI Core Output (Y/Y)(OCT)5.9
10:00Euro-Zone Core CPI (Y/Y)(OCT 01)4.10%
10:00Euro-Zone CPI (Y/Y)(OCT)3.40%
12:00USD MBA Mortgage Applications5.50%
13:30USD Building Permits(OCT)1.589M
13:30USD Housing Starts(OCT)1.580M1.555M
13:30USD Building Permits (M/M)(OCT)-7.80%
13:30USD Housing Starts (M/M)(OCT)-1.60%
16:00Fed Bowman speech
17:40FOMC Member Mary Daly Speech
18:30ECB President Lagarde Speaks

*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.