• UK retail sales worse than expected
  • German producer prices come out in line with expectations
  • Dollar struggles on budget uncertainty

Sterling volatile following disappointing retail sales

The pound performed well yesterday, gaining over 0.5% against a weaker dollar whilst trading broadly flat against the euro. A lack of economic data releases failed to provide the currency with much support. However, the pound climbed above $1.39 on Thursday for the first time since Britain's vote to leave the EU. This set the currency on track for a fifth consecutive week of gains against the US currency – its longest winning streak since mid-2014.

The pound has been buoyed by a combination of broad dollar weakness and optimism that Britain will reach a favourable divorce deal with the EU and that the economy will continue to grow at a healthy clip – albeit more slowly than if there had been no Brexit vote.

This morning we have had the release of UK retail sales which came out worse than expected, down 0.8% and 1.6% more than was expected on the respective monthly and annualised indices. Off of the back of this, the currency has paused for breath with investors reviewing the week’s data before moving back into the market.

Euro benefits from US uncertainty

The euro gained over 0.6% against the dollar yesterday after the greenback’s recent weakness allowed the single currency to stretch its legs. Euro sentiment has improved over the last few weeks as positive economic data releases have left investors beginning to question if the ECB will shorten its massive quantitative easing program.

This morning we have had the release of German producer prices which came out in line with expectations, up 0.1% on the monthly index but down 0.2% on an annualised basis. Off of the back of this, the currency has seen an increase in volatility, currently trading up slightly against the pound and dollar. 

Dollar struggles on political woes

The greenback continued to struggle yesterday, losing an average of 0.6% across the board. A disappointing housing starts number initially weighed on the currency. However, this was countered by a better than expected weekly jobless claims number. This mixed data, combined with rising fear over a possible US government shutdown as lawmakers struggled to cobble together a long-term federal budget deal, left the dollar on the back foot.

While a deal is being negotiated to fund the government through to 16 February, uncertainty over a long-term plan is likely to continue to weigh on the currency.

Today looks relatively quiet for the dollar. However, University of Michigan Sentiment data is expected to rise and could limit some of the downside pressure on the currency.

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