For the second day running, Sterling was undermined by weaker than expected economic data. The latest retail sales data recorded a 1.3% decline in sales volume for April following a revised 0.6% decline the previous month. With markets expecting sales to be broadly flat over the month, the sharp decline inevitably pushed Sterling weaker.
The latest government data released at the same time registered a borrowing requirement of GBP8bn for April. Distortions surrounding asset sales and transfers made comparison difficult, but there was a small net decline in the deficit from last year. There was cautious commentary from the IMF as it warned that the UK was still a long way from a sustainable recovery.
The latest Bank of England minutes again recorded a 6-3 vote for quantitative easing to be left on hold in May, the same vote as had been seen for the past four months. Governor King was again out-voted by the majority of MPC members. Although there was a slightly more optimistic economic tone in the minutes, Sterling weakened to lows below 1.51 against the dollar.
The Swiss franc was an important focus during the European session. The currency was already showing signs of vulnerability and losses accelerated following comments from National Bank Chairman Jordan. He did not rule out the possibility of raising the Euro minimum level from 1.20 at present while negative interest rates also remained a possible policy tool. The talk surrounding a higher minimum level pushed the franc to two-year lows above 1.26 against the Euro.
Ahead of the US open, there were comments from Fed Governor Dudley which suggested that the central bank would need 3-4 months before determining whether or not to taper bond purchases. The underlying dovish tone maintained a soft dollar tone ahead of crucial congressional testimony from Fed Chairman Bernanke.
In prepared remarks, Bernanke again stated that the Fed could increase or decrease the pace of quantitative easing depending on economic conditions. He was still concerned over underlying weakness in the labour market despite some signs of recent improvement with a warning over the damage of long-term unemployment. These remarks were broadly in line with comments from the previous Fed meeting as he looked to maintain as much flexibility as possible. He also expressed concerns that premature tightening could stall the recovery and be very costly.
The dollar weakened sharply following Bernanke’s comments with EUR/USD approaching key resistance in the 1.30 area as volatility spiked higher. Weakness quickly attracted fresh dollar buying as the Euro retreated rapidly to lows below 1.29 ahead of the European close.