Pound Sterling Today: GBP Slumps, Maybe Carney is right? GBP/EUR, GBP/USD and GBP/AUD All Deep in the Red
What's going on with the pound sterling today?
The pound has fallen against the majority of major currencies on the back of news that the UK consumer has turned a little cautious after a bullish summer:
- The pound to euro exchange rate is 0.57 pct lower on a daily basis at 1.1873.
- The pound to dollar exchange rate is 0.41 pct higher at 1.6080.
- The pound to Australian dollar exchange rate is 0.15 pct lower at 1.6938.
[Keep in Mind: The above quotes are taken from the wholesale markets, your bank will subtract their own spread when passing on a retail rate. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please learn more here.]
Today's poor retail sales data makes the markets question themselves on rates
The latest stats show forecasted retail sales proved too optimistic, prompting a GBP sell-off as traders consider the possibility that the strong UK recovery could be at its limit.
It was shown that Retail Sales (YoY) (Aug) came in well below expectations at 2.1%. Analysts had forecast 3.3%.
Retail Sales ex-Fuel (YoY) (Aug) came in at 2.3%, well below the expected 3.1%.
Retail Sales (MoM) (Aug) actually declined by 0.9% against expectations for growth of 0.4%.
"Get ready for a tightening of purse strings in the UK. People have spent money in the summer and have commenced saving for Xmas," says a flash note from currency brokerage WorldFirst.
Does today's data indicate that Carney is right about interest rates?
The big battle underway in the world of finance is that between the Bank of England and Governor Carney on one side and the markets on the other.
A strong economy should reflect strong employment gains, thus prompting the Bank of England to raise rates when the 7% target is reached.
With 2.5m unemployed, the jobless rate is 7.8%. Bank of England governor Mark Carney thinks it will take until 2016 to cut that to 7% but the money-markets think rates will rise sooner.
We reported the following expectations on the 11th of September regarding potential interest rate hike which shows not everyone agrees with Carney:
- Bank of England MPC: Q3 2016
- City Economists (Reuters poll): Q4 2015
- RBS: Q1 2015
- Bond markets: Q4 2014
The rise in GBP has been an expression of markets seeing the rate hike coming in line with market forecasts.
Peter Rosenstreich at Swissquote Research warns that the UK economy could indeed be cooling:
"Financial markets are betting that the UK recovery will continue, eventually forcing the BoE to abandon threats for additional asset purchases.
"The key risk to forward guidance has always been creditably, and it seems that Mark Carney and the markets are on a collision course. Interestingly, retail sales just released saw a significant drop to -0.9% vs. 0.4% exp and 1.1% so perhaps Carney is correct and we should brace for the UK economy to begin cooling."
City commentator Richard Northedge today writes that Carney could be right as the labour market will lag the broader recovery:
"There’s a lot of labour capacity in the economy without recruiting new staff. Companies can re-instate overtime without taking on new workers. Many self-employed (often a euphemism for unemployed) can take on much more work. Thus output can increase significantly without payrolls increasing.
"Having been slow to shed workers on the way into recession, companies are likely to be slow to add them on the way out."
We thus expect sterling to be tightly attuned to the UK economic calendar and the performance of the UK economy.
Should the PMI data due at the start of October reflect a cooling UK economy then expect the British Pound to be sold off further.