Sterling edges lower after Bank of England growth warning

The bank’s minutes continued to stress that interest rates were likely to rise gradually and that inflation in the UK was close to peaking, while stating that last week’s breakthrough in Brexit talks had lowered the risks of a disorderly EU exit. It did, however, warn that growth in the final quarter of the year may prove softer than in the third quarter. Overall, it seems clear that the BoE remains in no rush to hike again and any move remains unlikely until at least the second half of next year.

Somewhat contrastingly to the bank’s message on slower growth, UK retail sales smashed expectations in November. Yesterday’s data showed that sales grew by 1.6% in the year to November, much higher than the 0.3% consensus. This was driven largely by bumper sales surrounding Black Friday.

ECB President Draghi claims ‘very accommodative’ policy still required

The Euro retraced almost all of Wednesday’s gains yesterday, ending around half a percent lower after the latest European Central Bank meeting. As expected, the ECB also delivered very little, keeping its policy steady and continuing to stress that interest rate hikes in the Euro-area remain a long way off. The bank reiterated its guidance that rates will ‘remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases’.

ECB President Draghi was slightly more upbeat on the state of inflation in the Eurozone, claiming that the bank was more confident that inflation would return to target than two months ago. The bank also nudged upwards its inflation forecasts for next year. The ECB expects headline inflation to come in at 1.4% in 2018, before reaching 1.7% in 2020. There was also a fairly substantial upgrade in growth forecasts, as we had anticipated, following an impressive few months of economic data. Euro-area GDP is now expected to grow by 2.4% in 2017, up from the previous 2.2% forecast and by 2.3% in 2018.

Despite the renewed optimism, investors instead latched onto Draghi’s comment that a ‘very accommodative monetary policy support’ was still required in order to lift inflation, thwarting some hopes of a sooner-than-expected interest rate hike. The common currency ended as one of the worst performing major currencies yesterday as a result.

US retail sales have second best month in a year

The greenback benefitted from broad Euro weakness and a strong set of economic data on Thursday, with the Dollar index edging modesty higher during London trading.

US retail sales were particularly impressive in November, suggesting that domestic demand in the world’s largest economy remains strong. Sales climbed by 0.8% in the month, much higher than the 0.3% forecast. Equalling encouraging, the monthly manufacturing PMI from Markit jumped to 55.0 from 53.9 in December, adding to optimism that the US economy will finish 2017 on a strong footing.

Industrial production numbers in the US this afternoon will be the main draw in the currency markets today in an otherwise quiet end to the week.