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The Fed, as good as confirming a June rate hike successfully took trader’s attention away from trade; boosting the dollar as well as US equities, which had been languishing range bound in the red. The minutes from the May meeting were about as equity friendly as they are going to get from a Fed hiking rates - the Fed want to hike, but not so much that they strangle economic growth. Following the release, the Dow turned higher closing 52 points up, whilst the S&P closed 0.3% higher.
For dollar traders, the minutes had an element of dovishness, which caused the greenback to fall away from session highs. Whilst the Fed gave big hints over its intention to hike when it meets in June, the central bank failed to give the necessary clues that the markets looked-for over H2.
Fresh Trade War Concerns Hit Car Industry
The Fed touching on trade concerns did little to spook anyone. Instead, Trump single handily put trade risk firmly back on the table, as he lined up the next target of his America First policy. Before trade issues with China are even close to being resolved, Trump launching an investigation into the US automobile industry, similar to that of the Steel & Aluminium industry, is understandably unnerving the markets. Shares in Japanese and South Korean car makers are seen dropping heavily overnight, with the likes of Nissan and Toyota down 1.2% and 2.3% respectively, in a move which is likely to be mirrored in Europe on the open. With fresh trade fear wars circulating we are not expecting European bourses to make much head way in clawing back heavy losses from the previous session.
The pound was able to capitalise on dollar weakness following the Fed minutes, enabling GBP/USD to climb from the depths of $1.3305 hit on softer than forecast UK inflation, to a marginally more respectable $1.3363. Whether sterling will be able to maintain this level will depend greatly on this morning’s retail sales figures.
UK Retail Sales to rebound?
Following yesterday’s unexpected fall in headline UK inflation, traders will be looking at the retail sales figures with intrigue. Whilst retail sales are forecast to have declined on an annual basis in April on negative inflation adjusted wages and the timing of the Easter holiday; they are expected to have ticked higher on a monthly basis to 0.4%, recovering from March’s heavy fall. So whilst we know that wage growth has been outpacing inflation for a couple of months now, it is still too early for consumers to be feeling any real difference and too early for this to be portrayed in an increase in retail sales, particularly non-essential items.
After Wednesday’s surprise decline in headline inflation illustrated a return to the goldilocks (not too hot, not too cold) economy, it will take a decent surprise to the upside in today’s retail sales to even come close to convincing some pound traders that August’s hike remains a possibility. Should the data beat the pound could comfortably find itself through $1.34, whilst a disappointing read could quickly send the pound back to test $1.33
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