Euro loses some ground

The euro has retreated below the $1.10 level against the dollar following yesterday’s economic data in the US – which included a stronger than expected increase in retail sales in July – trading at around $1.0980 this morning. Sterling is more than holding its own against the US currency though, advancing to around $1.2870, and has also edged up versus the euro to about 85.25p, helped by data showing the UK economy is performing strongly.

Equity markets rallied on the back of yesterday’s data (the S&P 500 advanced by more than 1.5%) which will have helped allay investor concerns about a sharp slowdown in the US economy. Bond yields rose quite sharply though, with US 2-year yields increasing by almost 15bps, as the market pared back the scale of expected Fed rate cuts by the end of this year (to around 88bps from circa 100bps before the data).

Retail sales in the US rose by 1% in the month of July, well ahead of the consensus forecast for a gain of 0.4%, albeit this followed three months of weak sales from April to June, while the number of new jobless claimants fell by more than expected last week. Yesterday’s data wasn’t all uniformly positive though, with manufacturing output falling by 0.3% last month and the June outturn revised down to flat (from +0.4%).

Following the latest GDP data showing the UK economy expanded strongly in Q2, this morning’s retail sales report suggest it started off the third quarter on a solid footing as well with spending volumes rising by 0.5% in July, leaving them up 1.4% on July 2023.

In comments yesterday, Fed member Musalem said “the time may be nearing when an adjustment to our moderately restrictive (monetary) policy may be appropriate”, noting that the risks to inflation and employment have become more balanced.

Looking to the day ahead, economic data due include consumer confidence/inflation expectations and housing starts in the US and the trade balance in the Euro area.