Currencies and equities traded lower on Tuesday on the back of weaker US retail sales data. Consumer spending grew by paltry 0.3% in October. Spending growth slowed significantly from September when demand rose 1.6%.
This weakness raises concerns that with coronavirus cases surging, retail sales will slow further in remaining two months 2020. With their backs against the wall and no guidance from the federal government, many states have taken their own steps to curtail the spread of the virus by banning indoor dining and ordering the closure of some businesses.
Biotech companies are making solid progress towards a vaccine but the earliest we can expect broad dissemination is spring of 2021. That means the recovery witnessed in Q3 could disappear completely in Q4. As Federal Reserve Chairman Powell warned, the recovery has significant near term downside risks.
While housing market and building permits report scheduled to be released on Wednesday should show an ongoing housing recovery, demand for USD should be limited by the fear of further restrictions on business activity.
In Europe, there are early signs of the second wave slowing. Aggressive lockdowns across the continent are working with new virus cases in Germany, France, Italy, Belgium and the Netherlands finally coming down.
There are still alarmingly high numbers but the curve is moving in the right direction. Throughout this time, EUR has been very strong. One argument for the resilience of EUR is US lagging Europe by a few weeks which mean cases in the US will compound before they decline while cases in Europe will continue to fall from their highs.
The strongest currency on Tuesday was GBP. There was an article in the UK Sun that talked about the possibility of a UK-EU trade deal next week. Although, very little progress has been made on Brexit negotiations, the persistence of both sides and the overall strength of GBP is a sign that investors still believe an agreement can be reached before the end of the year.
Investors also liked Bank of England Governor Bailey’s optimism – he said recent vaccine news is encouraging and lifts uncertainty for businesses. UK consumer prices are scheduled for release tomorrow and the recent uptick in shop prices along with the central bank’s decision to leave inflation projections unchanged signals potential for an upside surprise.