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Soft retail sales hit GBP, BoE in focus
The UK retail sales, excluding auto fuel, contracted by 1.6%, worse than -1.0% expected by analysts and 2.0% printed a month earlier.

Cable retreated to 1.2704 posterior to the data.

The pound traders continue swinging up and down on major political developments posterior to last week’s problematic snap election in the UK and a busy economic calendar.

The weakness in today’s retail sales print, following Tuesday’s solid inflation and Wednesday’s soft wages growth data, inclined the market in favour of a softer pound.

The Bank of England (BoE) meets today and is expected to maintain the status quo. The BoE’s task is hard and the decision is delicate. The BoE is willing to keep the loose monetary conditions to give support to the British economy through the Brexit period. Yet unfortunately, the rising inflationary pressures have become a severe threat to the BoE’s mid-term policy outlook.

The headline inflation in May hit 2.9% year-on-year, the core inflation advanced to 2.6%.

The BoE will likely rely on the slowdown in wages growth as a foremost argument to stay pat. In theory, the widening gap between the wage and price inflation should weigh on British households’ purchasing power at some point and temper the inflationary pressures. In this respect, the weaker retail sales are in line with the BoE’s expectation.

But the timing of the downturn in inflation is still uncertain. It depends on how much margin the average consumer is left before actually reducing consumption.

The MPC is expected to vote 7-0-1 in favour of the status quo. Any hawkish shift should revive the BoE-hawks and bring the $1.30 level back on the radar.

FTSE down on energy stocks, Tesco

The FTSE 100 erased more than 50 points in London, as stronger pound and weaker oil weighed on the investor appetite.

Energy stocks (-1.04%) are leading losses, as the WTI crude consolidates below the $45/barrel. Oil markets took a fresh hit after the EIA data showed that the US crude inventories contracted by 1.7 million barrels last week, less than 2.3 million contraction anticipated by analysts.

Tesco weakened past 2%. According to the latest figures collected from the Bloomberg terminal, 42.86% of investors remain seller on Tesco.

Fed raised rates by 25 basis points; US dollar, yields dropped

As expected and widely priced in by the markets, the Federal Reserve (Fed) raised the interest rates by 25 basis points. The FOMC hinted at another rate hike before the end of this year, three more rate hikes in the course of next year and gave advance warnings on the upcoming balance sheet normalisation. Janet Yellen outlined $10 billion reinvestment cap as a part of the Fed’s portfolio unwind program.

On the data front, the US headline and core inflation eased for the fourth straight month in May and the retail sales dropped by 0.3% month-on-month. Nonetheless, FOMC Chair Janet Yellen interpreted the recent weakness in the US inflation as temporary due to one-off factors such as the reductions in wireless plans and lower medication costs.

Interestingly, the US 10-year yields nosedived to 2.10%, a fresh low since November presidential election and the US dollar depreciated on a typical buy-the-rumour-sell-the-fact reaction, as the Fed decision fell apparently short of the Fed hawks’ expectations in the June meeting.

The USDJPY plunged to 108.81. The EURUSD hit 1.1295 and the GBPUSD advanced to 1.2825, yet no major technical levels were breached.

The reaction in the US stock markets was mixed. The Dow Jones ended the Wednesday’s session 0.22% higher, while the S&P500 and the NASDAQ closed 0.10% and 0.41% lower respectively.

The US futures softened overnight, the sell-off in the IT stocks weighed on the NASDAQ futures (-0.59%). This said, the Fed decision will likely have no fundamental impact on the current trend in the US stock trading.

In the aftermath of the market reaction to the Fed decision, we expect the knee-jerk sell-off in the US dollar to cool down. Although the Fed has not surprised by a hawkish comment or action, the US monetary policy normalisation is happening in accordance with the FOMC’s unchanged plans.

Gold seeks direction after the Fed squeeze

Gold spiked to $1’280 following the Fed decision, then eased to $1’260/$1’266 in Asia. The yellow metal is rangebound between $1’254/$1’276 area. A negative breakout could extend to $1’245 (major 61.8% retrace on May – June rise & 100-day moving average) and $1’240 (200-day moving average). A positive breakout should encourage consolidation near the $1’280 level, before a further rise toward $1’295/1’300 mid-term resistance.

HKMA raised rates in tandem with Fed, HK bank shares dropped

The Hong Kong Monetary Authority (HKMA) rose the base rate to 1.50% in tandem with the Fed, stated that it could take new measures, when necessary, if the property market risk continues and warned the potential homebuyers about the rising risks on the mortgage rates.

Hang Seng wrote off 1.20%, as the Hong Kong banks erased 1.09%. HSBC traded down by 1% before recovering 0.59% in London.

Under the current circumstances, the HK banks are set to raise their rates gradually, meanwhile they expect certain capital outflows due to arbitrage.

Australian unemployment at 4-year low

Solid jobs data gave an additional push to the Aussie.

The AUDUSD advanced to 0.7635 on the broad-based USD sell-off posterior to the Fed’s policy announcement and consolidated gains in Sydney on the back of a surprise fall in the unemployment rate.

Unemployment in Australia fell to 5.5% in May from 5.7% printed a month earlier. The economy added 52’100 full-time jobs, versus 10’100 part-time job losses.

Solid fundamental data, combined to advantageous carry opportunities, due to low US yields, may encourage a further rise toward the mid-term support, 0.7750/0.7800.