GBP on a Tear Higher vs US Dollar; Warnings that Today's Retail Sales Could Pare Gains

The British Pound Sterling (Currency:GBP) enjoyed massive gains over the US Dollar overnight. We however see the UK currency is being solf off heavily following poor retail sales released at 09:30. Markets are decidedly busier on Thursday morning, expect much excitement!

A look at the wholesale markets, as of the most recent post:

• The Pound to US Dollar exchange rate is 0.43 pct down on last night's closing rate at 1.6077. (As the above graph and this article shows, the damage inflicted on the US Dollar by Sterling was done last night.)
• The Pound to Euro exchange rate is 0.69 pct lower at 1.1860.
• The Pound to New Zealand Dollar exchange rate is 0.9 pct lower at 1.9116.
• The Pound to Australian Dollar exchange rate is 0.18 pct lower at 1.6931.

[Keep in Mind: The above quotes are taken from the wholesale markets, your bank will subtract their own spread when passing on a retail rate. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please learn more here.]

Live Coverage:

16:31: Tomorrow @09:30 we get borrowing figures

Markets will be looking out for £12 BN to have been borrowed in August.

Last month we saw a surplus of 1.635 BN come into the UK Treasury coffers.

16:14: Worries for global central banks as US dollar weakens

There are significant repercussions to the FOMC decision delivered last night.

Kathy Lien says a strengthening Australian and New Zealand Dollar exchange rate will be a headache for some:

"It should be no surprise that the actions of the Federal Reserve can have global repercussions.   When Bernanke talked tapering in July, he drove global bond yields higher, creating a headache for other central banks.  

"Now, their decision to delay a reduction in asset purchases can also pose a problem for central banks of countries such as Japan, Australia and New Zealand who may have been banking on U.S. dollar strength to ease pressure on their own currencies.

"If their currencies continue to strengthen versus the dollar, these central banks may have to offset the drag on the economy with easier monetary policies."

13:32: Maybe Carney is right

In light with today's retail sales data, and the Northedge comment @10:28, Peter Rosenstreich at Swissquote Research warns that the UK economy could indeed be cooling:

"Financial markets are betting that the UK recovery will continue, eventually forcing the BoE to abandon threats for additional asset purchases.

"The key risk to forward guidance has always been creditably, and it seems that Mark Carney and the markets are on a collision course. Interestingly, retail sales just released saw a significant drop to -0.9% vs. 0.4% exp and 1.1% so perhaps Carney is correct and we should brace for the UK economy to begin cooling."

11:46: No recovery for the Dollar this year say UBS

While GBP/USD is correcting lower, it is worth keeping in mind that a full-blown sell-off is unlikely.

Geoffrey Yu at UBS believes that yesterday's FOMC outcome will keep the dollar weak until the end of the year.

"Dollar downside may be limited by risk-aversion in October owing to US fiscal risks and by other central banks responding by either cutting interest rates – the European Central Bank or the Reserve Bank of Australia for example – or talking dovishly to stop their currencies rising against the dollar. But only when the Fed feels more confident to start tapering will the dollar start to recover in the new year," says Yu.

10:28: UK interest rates will stay higher than markets expect

Key to the recent Sterling strength has been the expectation that the Bank of England will have to hike interest rates sooner than they would like to think.

Richard Northedge, writing on his 'The Edge' blog today says interest rates will in fact stay lower for longer as markets are underestimating the spare capacity in the work force. Remember, unemployment at 7% is the target set by the BoE that must be attained before they consider raising rates.

Northedge says:

"So there’s a lot of labour capacity in the economy without recruiting new staff. Companies can re-instate overtime without taking on new workers. Many self-employed (often a euphemism for unemployed) can take on much more work. Thus output can increase significantly without payrolls increasing.

"But the markets may yet win: despite Carney’s benchmark, the market can raise rates while the Bank continues to pretend they are 0.5 per cent."

10:10: The best 'summery' of today's poor retail sales outcome

"Get ready for a tightening of purse strings in the UK. People have spent money in the summer and have commenced saving for Xmas," says a flash note from currency brokerage WorldFirst. More on the reaction by the pound to euro exchange rate here.

09:40: Sterling sold off following retail sales stats

GBP/USD has sunk in the wake of today's retail sales figures.

It was shown that Retail Sales (YoY) (Aug) came in well below expectations at 2.1%. Analysts had forecast 3.3%.

Retail Sales ex-Fuel (YoY) (Aug) came in at 2.3%, well below the expected 3.1%.

Big falls in GBP/EUR.

08:52: So why no taper to Fed asset purchases?

The British Pound has enjoyed a strong run vs the US Dollar on news that the US Fed will in fact not stop squeezing the supply of free money to the global economy.

So why no taper? Because the Fed didn't like the rise in market interest rates says John Briggs at RBS.

Briggs cites the following communication from the Fed:

"Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further."

"The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market."

"Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative."

08:25: UK retail sale could pare back Pound Sterling gains

"Cable jumped above 1.61 following the steady Fed after being initially lifted also by news that the BoE's MPC members did not see the need for new stimulus. However, less buoyant UK retail sales today are now likely to erode part of these gains." - UniCredit Research.

08:20: Ahead we have retail sales

Sterling traders have retail sales data to consider at 09:30 this morning.

Retail Sales (YoY) (Aug) are expected to have grown 3.3%, up from last month's 3%.

Retail Sales ex-Fuel (YoY) (Aug) are forecasted higher by 3.1%, unchanged on last month.

08:15: New Zealand dollar on a tear higher

The British Pound has lost significant ground to a rampant NZ Dollar which was boosted by the overnight US FOMC event.

The NZ Dollar shot higher even as it was reported that drought slowed New Zealand's economic growth in the second quarter.

The New Zealand economy grew 0.2% in the April-June quarter from the previous quarter, however this was better than analysts had forecast.

08:12: Warnings that British Pound could retrace

Emmanuel Ng warns that overnight gains made by GBP could retrace:

"With a tailwind from the BOE MPC minutes on Wednesday, the GBP-USD popped above 1.6100 in the wake of the Fed but a reassessment may see a retrace towards the 1.6020 neighborhood. Note that despite all the flutter surrounding the FOMC, the EUR-GBP continues to drill lower, with the cross now inhabiting sub-0.8400 levels. We retain our 0.8320 target for the EUR-GBP."