Sharp jump in UK retail sales boosts cable, but gains short lived

Today’s macro highlights:

  • GBP - GDP revision for Q1
  • USD - Durable goods orders (April)

Sharp jump in UK retail sales boosts cable, but gains short lived

There was some good news for the UK economy yesterday with retail sales figures coming in well ahead of expectations. After the first few months of the year were blighted by bad weather, April saw consumers out in force and the headline figure jumped by 1.5%. Gains for the Pound are however looking difficult to sustain - cable is already back where we were before the release as closer inspection of the numbers suggests the economy remains subdued. Consumers are still wary over what lies ahead.

Broader dollar weakness was also seen off the back of falling US bond yields, which briefly rallied above the 3% level yesterday but failed to sustain the move. This downtrend is being driven by the Fed’s willingness to let inflation tick higher, but the implications for currency markets can’t be understated.

The first revision to the UK’s Q1 GDP reading at 9.30am BST will be under some scrutiny. The flash reading a month ago showed the UK economy expanding at just 0.1%, so this update will be closely followed. Should the revision be lower, the psychological impact of a negative print would initiate another sharp leg lower for the Pound, whilst on the flipside, news that the first number was far lower than should have been expected would be well received going into the long weekend.

There’s a handful of economic readings out of the US today at 1.30pm BST but the high profile one is the Durable Goods Orders for April. This is typically a volatile reading that flips between growth and contraction. The market is eyeing a 1.4% decline in the reading and given the overshoot of expectations in March, it would arguably take a big shortfall to have any meaningful impact on the dollar’s fortunes. The University of Michigan consumer sentiment survey is slated for 3pm BST and again this might provide some fresh direction heading into the weekend break. Certainly a notable fall away from the 98.8 seen a month ago would suggest the US economy could be starting to slow.

On Monday, markets in both the UK and US will be closed for national holidays. Although currency markets continue to trade, the absence of economic data could well lead to increased levels of volatility in the near term.

GBP/USD
Cable managed its biggest one day gain in a month yesterday, although at a mere 0.3 cents, it’s far from compelling. As noted the gains have already been eroded, although more good economic news out of the UK could see the market upweighting the prospect of an August rate hike. Failing that, a decline towards the November lows around 1.31 remains a distinct possibility.

EUR/USD
Falling US treasury yields helped the pair to a rare day of gains but like cable, the bounce has already been unwound. November lows below 1.16 look very much in focus and although a general absence of Eurozone economic data today could help slow the decline, concerns over the Italian political situation now the new populist Prime Minister has been accepted could be an excuse for further selling.

GBP/EUR
An upward trend remains in play - but it’s a painfully slow one. The pair really is struggling to make meaningful progress with the gains hard fought and quickly lost. Getting more certainty over UK rate policy and whether we’ll see a hike in August would certainly have the potential to drive the pair to 12 month highs around 1.16.

Did you know…

Sterling has had a rough ride over the last five weeks, with GBP/USD falling by 10 cents from those recent highs near 1.44 - that’s almost 7%. But it’s important to bear in mind the greenback has been on something of a roll. Over the same period, the Turkish Lira has fallen 12.5%, the Mexican Peso by 8.5% and the Hungarian Forint by 8%. The Argentine Peso is however in a league of its own, having lost almost 18% since mid-April. Few currencies have seen any notable appreciation against the dollar over this period - the Russian Rouble has gained 1.2%, whilst the Haitian Gourde is the top performer, tacking on a mere 1.5%.