The Pound Sterling (GBP) outperforms its major peers on Friday due to stronger-than-expected United Kingdom (UK) Retail Sales data for September. The Retail Sales data, a key measure of consumer spending, grew by 0.3%, while economists anticipated it to decline by 0.3% month-on-month. On year, the consumer spending measure rose at a robust pace of 3.9%, higher than estimates of 3.2% and the August reading of 2.3%, which was downwardly revised from 2.5%.

The report showed that overall sales were boosted by higher receipts at the other non-food stores and department stores, the ONS said.

Upbeat Retail Sales data is expected to partially pare back expectations that the Bank of England (BoE) could cut interest rates in each of the two meetings remaining this year. Markets started to price in this possibility after Wednesday’s Consumer Price Index (CPI) data for September showed that inflation fell more than anticipated below the BoE's 2% target.

Inflation in the services sector – a closely watched indicator by BoE officials – decelerated to 4.9%, the lowest level seen since May 2022. The softening of price pressures in the services sector boosted traders’ confidence that inflation is getting under control.

Daily digest market movers: Pound Sterling bounces back against US Dollar

The Pound Sterling gains ground near the psychological support of 1.3000 against the US Dollar on Friday. The GBP/USD pair gains ground as the USD struggles to extend its five-day winning streak, with the US Dollar Index (DXY) edging lower to near 103.65 from 103.87 on Thursday, which was the highest level in more than 10 weeks.

The outlook for the Greenback remains positive as traders appear to be betting that the Federal Reserve (Fed) will cut interest rates gradually rather than aggressively. According to the CME FedWatch tool, 30-day Federal Funds futures pricing data shows that there will be a 50 basis points (bps) decline in interest rates for the remainder of the year, suggesting that the Fed will cut its borrowing rates by 25 bps in November and in December.

Meanwhile, upbeat United States (US) monthly Retail Sales and lower weekly Jobless Claims have reinforced confidence in the resilience of the economy. Retail Sales rose by 0.4% in September, faster than estimates of 0.3%. The number of individuals claiming jobless benefits for the first time came in at 241K, lower than the 260K expected.

Apart from upbeat data and growing speculation for the Fed's gradual rate cut path, rising expectations of former US President Donald Trump winning the presidential election have also strengthened the US Dollar. Market participants expect that the Trump 2.0 administration will bring higher import tariffs, tax cuts and loosening financial conditions, which traders assess as US Dollar positive.

Technical Analysis: Pound Sterling rebounds from 100-day EMA

The Pound Sterling discovers strong buying interest near the psychological support of 1.3000 in Friday’s London session. The GBP/USD strengthens after gaining ground near the 100-day Exponential Moving Average (EMA), which trades around 1.2990.

The 14-day Relative Strength Index (RSI) returns swiftly into the 40.00-60.00 range after slipping below it, suggesting that value-buying kicked-in.

Looking down, the upward-sloping trendline drawn from the April 22 low at 1.2300 will be a major support zone for Pound Sterling bulls near 1.2920. On the upside, the Cable will face resistance near the 20-day EMA around 1.3120.

Source: FXSTREET

Source: AP

The European Central Bank cut interest rates again on Oct 17, upping the tempo at which it is lowering borrowing costs as inflation in the eurozone cools faster than expected.

The Frankfurt-based institution reduced rates by a quarter point, following a cut of the same size at its last meeting in September.

Oct 17’s move was the first time that the ECB has cut rates back to back since it started its cycle of easing rates in response to declining inflation.

After peaking at 4 per cent, the ECB’s benchmark deposit rate sits at 3.25 per cent following the latest cut.

The decision came after a late downwards revision to September’s inflation data in the euro zone on Oct 17.

Consumer prices in the bloc rose by 1.7 per cent year on year in September, according to the EU’s data agency Eurostat, 0.1 percentage points less than the initial estimate.

Before the change, September’s reading was already the first time in three years that inflation in the eurozone had dipped below the ECB’s two-per cent target.

The incoming data showed that the process of cooling consumer prices was “on track”, the ECB said in a statement.

“Inflation is expected to rise in the coming months, before declining to target in the course of next year,” the ECB said.

Slovenia meeting

ECB rate-setters met in Slovenia to discuss their next move, as they made one of their regular tours away from the institution’s headquarters in Frankfurt.

Oct 17’s decision was the third time that they have cut since rates reached their peak.

The bank cranked rates up higher and faster than ever before in response to soaring inflation in the wake of the Covid-19 pandemic and the Russian invasion of Ukraine.

But recent, lower-than-expected inflation figures have added to the sense among policymakers that consumer prices are back under control.

Weakness in the euro zone economy gave the ECB a further reason to lower borrowing costs and bring some relief to households and businesses.

“Recent downside surprises in indicators of economic activity” supported confidence that inflation was heading durably towards two per cent, the ECB said.

The move to follow up September’s cut with another reduction suggested that the ECB was “much more concerned about the euro zone’s growth outlook” than before, ING analyst Carsten Brzeski said.

With that came the risk of “inflation undershooting the target”, Mr Brzeski said.

“It’s hard to see how today’s rate cut cannot be seen as a signal that the ECB is now in a hurry to bring interest rates down,” he said.

‘Data-dependant’

The ECB itself said it would “continue to follow a data-dependent and meeting-by-meeting approach”. The bank was not “pre-committing to a particular rate path”, it added.

ECB president Christine Lagarde was due to speak following the decisions, with analysts eager to parse through her comments in Slovenia for an indication of the thinking among ECB policymakers about the future path of rates.

She was unlikely to “correct market expectations for another 25 basis point move” at the ECB’s next meeting in December, Berenberg bank analyst Holger Schmieding said.

Going into 2025, observers expected the ECB to keep lowering interest rates at a steady pace with a string of cuts.

The ECB might even provide a hint that it would pursue further reductions “until they reach a neutral rate of two percent to 2.5 percent by the middle of next year”, said director of economic studies Eric Dor at the IESEG business school in France. 

Source: Straitstimes

US retail sales increased solidly in September likely as lower gasoline prices gave consumers more money to spend at restaurants and bars, supporting the view that the economy maintained a strong growth pace in the third quarter.

The slightly stronger-than-expected rise in sales reported by the Commerce Department on Thursday also reflected sharp increases in receipts at clothing store outlets as well as miscellaneous store retailers. Consumers boosted online purchases and spent more at health and personal care stores.

Spending and the overall economy are being underpinned by solid income growth, ample savings as well as strong household balance sheets. Though labor market momentum has slowed, layoffs remain historically low, supporting wage gains.

Signs of the economy's resilience likely will not discourage the Federal Reserve from cutting interest rates again next month, but will cement expectations for a smaller 25-basis-point reduction in borrowing costs.

"Strong consumer spending in September suggests economic growth in the previous quarter was solidly above trend," said Jeffrey Roach, chief economist at LPL Financial. "Our baseline remains that the Fed will likely cut a quarter of a percent in both November and December."

Retail sales rose 0.4% last month after an unrevised 0.1% gain in August, the Commerce Department's Census Bureau said. Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, would rise 0.3%. Estimates ranged from no change to an increase of 0.8%.

Retail sales advanced 1.7% on a year-on-year basis in September.

Gasoline prices dropped by about 12 cents per gallon between August and September, data from the US Energy Information Administration showed.

Receipts at food services and drinking places, the only services component in the report, jumped 1.0%. That followed a 0.5% rise in August. Economists view dining out as a key indicator of household finances.

Sales at clothing stores rebounded 1.5% after falling 0.8% in the prior month. Receipts at miscellaneous store retailers surged 4.0%, while online sales climbed 0.4%. Grocery store sales vaulted 1.0% and receipts at general merchandise stores rose 0.5%. Building material and garden equipment store sales gained 0.2%. Consumers also spent more at sporting goods, hobby, musical instrument and book stores.

Gains in these store categories more than offset a 3.3% decline in sales electronics and appliance stores as well as a 1.4% drop in receipts at furniture outlets. Sales at auto dealerships were unchanged, while receipts at service stations dropped 1.6%, reflecting lower gasoline prices.

The dollar advanced against a basket of currencies. US treasury yields rose.

Jobless claims fall

A separate report from the Labor Department showed initial claims for state unemployment benefits dropped 19,000 last week to a seasonally adjusted 241,000 last week, but the impact of hurricanes and a month-long strike at Boeing are making it harder to get a clear read of the labour market. Economists had forecast 260,000 claims for the latest week.

Claims jumped to more than a one-year high in the prior week, which was attributed to Hurricane Helene. The storm devastated Florida and large swathes of the US Southeast in late September. The ebb in filings from Helene is likely to be offset by an anticipated deluge of claims due to Hurricane Milton, which slammed into Florida weeks after Helene.

The claims report covered the week during which the government surveyed employers for the non-farm payrolls component of October's employment report. Economists expect policymakers won't place too much weight on the employment report when they meet in early November. The report will be released days before the Nov 5 US presidential election.

The US central bank embarked last month on its easing cycle with an unusually large half-percentage-point cut in its policy rate, lowering it to the 4.75%-5.00% range, amid growing concerns about the labor market. The Fed hiked rates by 525 basis points in 2022 and 2023 to curb inflation.

"As we have long argued, consumer spending, net hiring, and payroll income have been locked in a resilient and self-reinforcing virtuous cycle throughout this expansion, supercharged by gains in household wealth and labour supply," said Jonathan Millar, senior US economist at Barclays.

"Durable deterioration in consumer spending would require something to meaningfully undermine this cycle, such as increased precaution by consumers that lifts the saving rate or reluctance to hire by businesses, despite solid demand."

Retail sales excluding automobiles, gasoline, building materials and food services increased 0.7% last month after an unrevised 0.3% rise in August. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

Growth estimates for the third quarter are around a 3.2% annualised rate. The economy grew at a 3.0% pace in the second quarter.

Source: The edge markets

France's belt-tightening budget delivers a bigger tax hit than the government originally let on, according to new breakdowns that suggest a bigger dent in President Emmanuel Macron's pro-business legacy.

Prime Minister Michel Barnier presented a 2025 budget bill last week putting what ministers said was a 60 billion euro ($65.2 billion) squeeze on the public finances, made up two thirds of spending cuts and one third tax hikes.

The government stressed the tax hikes would be mostly borne by big companies, with a temporary surtax on groups with over a billion euros in revenue, and wealthy individuals earning more than a quarter of a million euros.

But while Barnier's ministers insisted the tax hikes amounted to less than 20 billion euros, the annex to one of their own budget documents released this week puts the tally at 29.5 billion euros.

The new tax hikes, worth about one percent of economic output, are roughly equivalent to the tax cuts Macron has given companies since he became president in 2017 on a pro-business reform agenda.

"The risk, then, is that a major tax-based consolidation will squander Macron's legacy and affect the supply side negatively," said Jean-Pisani Ferry, an early architect of Macron's economic strategy who has since taken distance.

"For this not to happen, business and investors should believe taxes are actually temporary and forgive Barnier for having introduced them as a temporary fix," he said in a note for Brussels think-tank Bruegel.

BIGGER TAX BURDEN

The discrepancy comes down the government classifying some measures as spending cuts in the headline number and as tax hikes in the more detailed breakdown, said Allianz Trade senior economist Maxime Darmet.

A case in point is a planned reduction in the tax breaks on social security payroll contributions for low-income workers that was classified at once as a spending cut and a tax hike.

No matter how the move is classified, it will hit many small and mid-sized firms that employ a lot of minimum wage workers, which flies in the face of government promises that tax hikes spare them by targeting big companies.

Reductions in incentives for hiring apprentices and the rollback of a temporary tax cut on electricity, which were not included in the government's headline tax hike numbers, will also have a wide impact on companies.

"The government is playing with words to give the impression that they are doing more on spending than revenues," Darmet said.

In France's highly fractured parliament, the government calculated that spending cuts would go down more smoothly than tax hikes, which Macron's party and Barnier's own conservatives are deeply uncomfortable with, he added.

The far-right Rassemblement party, whose tacit support the government needs to survive a potential no-confidence vote, has blasted Barnier's budget, demanding more spending cuts be included.

WINDOW DRESSING

While the tax shock is bigger than flagged, the spending squeeze is much smaller, as the independent fiscal watchdog was quick to point out.

The government based its spending cut estimates on where spending would have been in 2025 had nothing been done to rein it in - a starting point Rexecode economist Charles-Henri Colombier said was debatable.

The fiscal watchdog, mandated by law to determine whether the government's numbers stack up, estimated the overall budget squeeze was worth 42 billion euros rather than the government's 60 billion, with 70% coming from tax hikes and the rest from spending cuts.

"France has a fundamental problem with really doing something about its spending and even in the current emergency situation keeps window-dressing by increasing taxes rather than cutting spending," Colombier said.

Source: The edge markets