Pound records strong recovery in wake of retail sales
There was a sharp spike in the GBP-EUR rate after today's UK retail sales figures blew analyst expectations out of the water:
Year-on-year UK Retail Sales increased 2.2 pct in June, compared with the 2.1 pct rise in May and above forecasts of +1.7 pct.
On a monthly basis UK Retail Sales rose 0.2 pct in June, after growing 2.1 pct in May, as projected.
Annual Retail Sales excluding Fuel increased 2.1 pct, down from the 2.3 pct rise but above market consensus of 1.6 pct growth. Month-over-month Retail Sales excluding Fuel edged up 0.2%, following a 2.1 pct increase, as expected.
However, we note that while the impact of the figures were positive for sterling they just haven't had the ability to really get a rally in GBP-EUR started.
Expectations that the Bank of England will stifle sterling… somehow
So what is bothering the British pound then?
It is the Bank of England which yesterday opted to pretty much scrap its quantitative easing programme.
The problem for sterling is that the Bank has warned that it remains dovish (ie. willing to take measures to keep money within the financial system flowing).
Ross Walker at RBS says:
"The key conclusion we take from the July Minutes is not so much that they represent a 'hawkish' move but rather that the MPC's policy focus is gravitating away from QE and longer-dated rates and towards Bank Rate expectations and the shorter end of the curve.
"The July Minutes make several opaque references to 'other options', but much of this seems to amount merely to dovish rhetoric and forward guidance (perhaps an explicit MPC Bank Rate forecast, though it is far from clear that this would have any major impact on market sentiment)." More from Walker here.
KBC Markets: Sterling is a BUY on any setbacks
While we see sterling as being likely to struggle there is once advocate for further gains in the GBP-EUR rate (EUR-GBP decline).
Piet Lammens at KBC Markets has today told clients that he is looking to sell the euro against the pound on any spikes in EUR-GBP:
"Yesterday we advocated stop-loss protection on EUR/GBP longs as we assumed that the market was positioned sterling short/expected a soft tone from the minutes.
"After yesterday’s rebound of sterling, the topside in EUR/GBP should be better protected. There might be quite some volatility ahead of us in the run-up to the August meeting. Even so, we change our short-term bias for EUR/GBP and look to sell EUR/GBP in to strength in case of return action toward the recent highs."
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