FX Focus: Pound gains ground against the dollar as retail sales growth hits 14-year high

The pound struggled for direction on Thursday (17 November), after official data showed retail sales in October recorded the biggest yearly increase since April 2002.

By early afternoon, sterling was 0,12% lower against the euro, trading at €1.1622 but gained 0.18% against the dollar, exchanging hands at $1.2463, after briefly breaking above $1.25.

According to the Office for National Statistics (ONS), retail sales including auto fuel rose 7.4% on an annual basis in October, marking the biggest increase in 14 years, and compared with analysts' expectations for a 5.3% gain. Meanwhile, September's gain was revised up from 4.1% to 4.2%.

"The lower pound is also helping to boost retail sales as a weaker currency helps many to buy British and helps boost the economy," said James Hughes, chief market analyst at GKFX.

Elsewhere, having hit its highest level in over 13 years in the previous session, the dollar struggled for direction on Thursday. The greenback was 0.17% lower against both its Canadian counterpart and the euro, trading at CAD$1.3423 and 0.9324 euro cents respectively.

However, the US currency was 0.13% and 0.43% higher against the yen and Australian dollar, fetching ¥109.26 and AUD$1.3402 respectively.

The dollar could receive a further boost after it emerged Federal Reserve chairwoman Janet Yellen will warn it would be "a mistake" to leave interest rates on hold for too long.

"Were the Federal Open Market Committee to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the Committee's longer-run policy goals," Yellen will tell the Congress later today (17 November).

"Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability."

Trump panic begins to subside

Naeem Aslam, analyst at Think Markets UK, said it was a case of "done deal" as far as move to raise interest rates next month was concerned. "Janet Yellen has further cemented the argument that a rate increase could take place next month," he said.

"It is a done deal and the question which we are focused on is if the Fed is sensitive to Treasury yields. It is widely believed that the strength in the dollar and the elected president's promise of fiscal spending are the major reasons for the move in Treasuries."

Donald Trump's surprise victory last week looked to have put next month's expected rates hike off the table, only for the panic to quickly subside, paving the way for the Fed to go ahead. Conversely, the US central bank might in fact have to raise interest rates quicker than it expected, to ensure Trump's ambitious spending plans don't translate into a spike in inflation.

"The Fed has been keen to be slightly ahead of the curve in order to avoid the need to raise rates faster when inflation does pick up and risk choking of the recovery or even risk throwing the economy back into recession," said Oanda's senior market analyst Craig Erlam.