US retail sales data was much stronger than expected and there was a notable beat for the Philly Fed index.

US retail sales data was much stronger than expected and there was a notable beat for the Philly Fed index. The data bolstered expectations of Federal Reserve policy tightening announcement this year. US bond yields moved higher after the US sales data.

Risk appetite overall remained fragile amid unease over global supply issues. Wall Street equities posted losses but recovered from intra-day lows. Chinese equities lost ground on Friday with Asian bourses overall mixed.

The dollar posted sharp gains following the data before fading from the peak levels. EUR/USD dipped to lows near 1.1750 before a tentative recovery. Sterling held firm despite a retail sales miss and GBP/USD losses as Bank of England expectations provided further support. Commodity currencies retreated sharply as the dollar posted gains before paring losses.

The Euro was unable to make any headway ahead of Thursday’s New York open with caution prevailing ahead of the US data releases. Latest opinion polls for the German election continued to indicate strong support for the SPD and Green parties which maintained a focus on potential fiscal policy changes.

US retail sales increased 0.7% for August compared with expectations of a 0.8% decline, although there was a downward revision to a 1.8% dip for July. Underlying sales gained 1.8% on the month compared with market expectations of a 0.1% retreat on the month while there was a strong 2.5% increase in control group sales after a 1.9% retreat the previous month. Auto sales declined 3.6% on the month, but there was a strong increase in non-store sales.

The Philadelphia Fed manufacturing index strengthened to 30.7 for September from 19.4 the previous month and well above market expectations of 19.0. There was a strong increase in shipments, but there was a significant slowdown in growth in new orders and unfilled orders on the month.

There were solid increases in the work week and employment on the month while there was a slight slowdown in the rate of increase in costs and prices. Companies were less optimistic over the outlook with unfilled orders expected to decline while price increases were expected to moderate slightly.

Market reaction was driven primarily by the headline retail sales data and the dollar posted sharp gains following the release. The impact was magnified by the fact that markets overall were positioning broadly for a weak sales figure which triggered dollar short covering.

EUR/USD dipped to lows fractionally above 1.1750 before a limited recovery later in the day. The Euro gained some brief respite from reports that internal ECB documents showed a higher inflation rate over the medium term. EUR/USD edged higher to 1.1770 on Friday with the dollar fading from its best levels.

US initial jobless claims increased to 332,000 in the latest week from a revised 312,000 previously and close to consensus forecasts while continuing claims declined to 2.67mn from 2.85mn which maintained optimism over the labour market and expectations that workers would return to the labour market.

US Treasuries lost ground following the batch of strong US data releases with the 10-year yield increasing to around 1.33%. The dollar posted net gains after the data, but the yen gained net support from the slide in equity markets and USD/JPY gains were held to around 109.65.

US equities pared losses later in the session with USD/JPY around 109.70. There was still a significant element of caution ahead of next week’s Federal Reserve policy statement with markets edging towards a consensus that the FOMC will announce a tapering of bond purchases in November.

Chinese equity markets lost ground on Friday amid further reservations over the property sector and coronavirus control measures in the Fujian province were tightened. Overall moves were contained with USD/JPY posting net gains to around 109.85 in early Europe and EUR/JPY around 129.30.

Sterling continued to advance ahead of Thursday’s New York open with on-going expectations of a more hawkish Bank of England policy tone and move towards higher interest rates. There were upgraded assessments by investment banks with futures markets indicating the potential for two rate hikes next year.

GBP/EUR briefly rallied to test the important 1.1750 area while there was a GBP/USD test of 1.3850.

The UK currency dipped lower after the US open with the dollar gaining ground while a decline in equity markets and weaker risk conditions undermined UK support. GBP/USD dipped to lows around 1.3765 before a tentative recovery while GBP/EUR settled around 1.1715.

UK retail sales declined 0.9% for August compared with expectations of a 0.5% increase and there was no year-on-year growth.

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