UK Optimism Priced In As Retail Sales Dip

The Pound has been unable to derive further support from stronger sentiment towards the economy with the currency vulnerable to a correction, especially given the substantial number of long Pound positions. UK data provided no Pound support with risk conditions and IT issues monitored closely during the day.

The Pound to Euro (GBP/EUR) exchange rate has retreated to 1.1880 while the Pound to Dollar (GBP/USD) exchange rate has also corrected further to 1.2930 from 11-month highs above 1.30 earlier in the week.

Although there has been no change in expectations for interest rates with markets pricing in over a 95% chance of a September rate cut, US bond yields have crept higher amid concerns over longer-term financing trends and an expansionary fiscal policy.

Higher bond yields have helped underpin the dollar, especially with increased volatility in equity markets.

As far as US politics are concerned, opinion polls have suggested a stronger lead for Trump, although the narrative could shift again given increased speculation that President Biden will pull out of the race this weekend.

ING commented; “Were President Biden to step aside, there is a scenario where the dollar could come a little lower on the view that Democrats would have a better chance of retaining the Senate and that we would be looking at a ‘Trump Constrained’ scenario.”

UK retail sales volumes declined 1.2% for June after a 2.9% jump in May and compared with consensus forecasts of a 0.6% retreat.

Sales volumes posted a slight 0.1% decline for the second quarter compared with the previous quarter.

There was a decline in all categories for the month except for fuel sales.

Underlying sales declined 0.8% on the month after a 1.6% increase previously.

The GfK consumer confidence index edged higher to -13 for July from -14 the previous month. Although there were consensus forecasts for a slightly stronger improvement to -12, this was the strongest reading since August 2021.

According to Joe Staton, Client Strategy Director GfK; “July’s consumer confidence poll suggests a note of caution as people wait to see exactly how the UK’s new government will affect the wider economy and their personal finances.”

Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics is optimistic over the outlook; “We think that consumers’ confidence will continue trending up as real incomes power forward this year, while the prospect of interest rate cuts from the Bank of England help too.”

As far as government finances are concerned, the borrowing requirement declined to £14.5bn for June from £17.7bn the previous year.

An important element was the decline in debt interest payable to £7.4bn from £12.9bn the previous year and the monthly borrowing requirement was above OBR expectations.

The data illustrates that there is little room for manoeuvre on fiscal policy for the new government.