Fading Sterling OptimismBy Peter Rosenstreich
In our view the GBPUSD rally to 1.4280 is more a function of USD weakness than confidence in the UK. We remain slightly bearish on the outlook for sterling. Despite general optimism driven by the positive progress in Brexit talks, driven by the failure of post-Brexit recessionary predictions to materialize and the strength of trading partners, the UK is in a fragile place. There is increasing evidence of a global slowdown which will manifest itself in weaker UK growth and inflation. This will also decelerate BoE interest rate expectations providing the USD sustains yield differential and rotating investors return to USD from GBP.
Finally, increased focus on complex trade talks, led by US / China, will likely push Brussels into a tougher stance on UK relations. Breakthroughs will become harder to achieve. We think the market was muted in pricing in proposals for a border between Northern Ireland and the Republic. Given the complexity of the issue both from a Brexit economic standpoint and social/political one, we should have seen higher GBP volatility. In regards to Brexit, investors have clearly been conditioned to ignore short-term hype, hence the lack of movement. UK-EU must avoid a hard border of extensive custom checks. The Republic of Ireland and Northern Ireland will impose on negotiations moving forward.
March retail sales in focusBy Arnaud Masset
The US dollar edged lower against most G10 currencies on Monday morning as traders eye March retail sales figures, which are due for release later this afternoon. On the other hand, the greenback extended gains against most emerging market currencies after India was added to the US Treasury’s monitoring list for currency manipulation. The decision triggered a small sell-off in the region’s currencies amid fears the US could add more countries to the list. In addition, the Syrian situation has lowered traders’ risk appetite. The Indian rupee fell 0.34% against the buck, the South Korean won slid 0.39%, while the Indonesian rupiah was down 0.20%.
After contracting 0.1%m/m in February, headline retail sales are expected to bounce back 0.4%m/m in March as economists anticipate that Trump’s tax cuts will jump-start consumption. It must be noted that the economic environment has been supportive with falling unemployment rate, modestly rising wages and solid economic growth. However, after three consecutive months of contraction, another disappointing reading could only send the dollar lower.