Sterling fails to solidify 1.35 against the dollar despite positive retail sales

GBP

Sterling extended its rally against the dollar in yesterday's session largely due to a broad unwind in the US dollar against G10 currencies. However, in lieu of any idiosyncratic drivers, the pound began to post losses against the euro as the single currency lept on the broad dollar strength as it looks to rebound from plumbing fresh year-to-date lows. This morning, the pound has struggled to gain a footing against the dollar with GBPUSD trading relatively flat throughout the overnight session. The positive beat in October's retail sales this morning did result in some mild GBP strength, however, much of this has now been unwound as the increase in retail sales is viewed as a transitory factor. Retail sales volumes for October rose 0.8% MoM when including fuel, with the core reading rising 1.6% MoM. Both substantially exceeded expectations, but the first increase in retail sales volumes in 5 months is largely viewed as pre-emptive Christmas shopping as consumers adjust for likely supply issues closer to December. This is evident in the non-food category, which drove the upwards surprise in the headline figure. Today, the main event will be the fireside chat with BoE Chief Economist Huw Pill at 12:00 GMT. Pill has been fairly non-committal in his public appearances so far, he may provide further colour on imminent policy decisions seeing as today's speech is his first appearance outside of Parliamentary hearings since the November meeting.

EUR

The single currency followed the move in US Treasuries yesterday and rose from the ashes with a 0.45% rally. This morning, however, as news of tighter restrictions for the unvaccinated in Germany and a 20-day full lockdown in Austria flash across investors' screens, the single currency is back under the pump again. Additionally, back-end Treasury yields, which have proven so deterministic for EURUSD price action, have also started the day off 1.6% higher. The tide may change for the single currency with President Lagarde set to speak at 08:30 GMT in Frankfurt and Jens Weidmann set to follow at 13:00 GMT. Thus far, markets have bought into the ECB's dovish message that was delivered in the October meeting and reinforced by policymakers in the weeks following. Options markets are now not pricing the first rate move by the ECB until February 2023, a full 3 months later than the December meeting that was priced in prior to the October meeting.

USD

The dollar dropped across the G10 board yesterday as US yields sank and EM FX markets sold off. The move in Treasury yields was likely a flight to safety from EM investors following a 4% sell-off in the lira and over a percentage point drop in RUB, MXN and ZAR throughout the session. On the data front, initial jobless claims printed slightly higher than expected at 268,000 while continuing claims fell from 2.16m to 2.08m. Meanwhile, the survey data released yesterday was mixed, with the November Philadelphia Fed Business Outlook printing at 39.0 relative to October's 23.8 reading, while the Kansas City Fed Manufacturing Activity data slumped from 31 to 24. On the whole, the data didn't prove too decisive for the dollar as opposed to overall market risk conditions. The picture was similarly mixed among Fed speakers yesterday, with Chicago Fed Evans stating that it is unlikely that a 2022 rate hike will be warranted, while at the same time the Atlanta President says it would be appropriate to raise rates sometime around summer 2022. Sitting in the middle of the spectrum, New York President Williams focused on long-run inflation expectations and his desire for them to remain anchored to the 2% target at a time when short and medium-term inflation expectations are rising. Today, the dollar is back on the offensive as the Treasury curve bear steepens yet again. Rounding off the week's economic calendar is Fed Governor Waller, who is set to discuss his economic outlook at 15:45 GMT.

CAD

A stabilisation in oil markets yesterday helped the loonie stem its losses and stabilise around lows not seen since early October. With crude now sitting just shy of $80 per barrel again, the Canadian dollar might start retracing recent losses. However, any substantive price action in CAD is likely going to have to wait until the release of September's retail sales data at 13:30 GMT. Sales are expected to have fallen by 1.7% MoM, driven partly by rising fuel prices but also due to the ongoing substitution towards services spending with the sector reopened. Price pressures on household budgets are likely to have also weighed on retail sales spending in September as households tighten their belts before periods of increased spending during the Thanksgiving and Christmas months. A positive surprise in the data, along with equities trading in the green and a firmer oil price, should give loonie traders enough of a reason to start driving the USDCAD rate back down again.

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