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- UK retail sales beat expectations, bode well for the economy.
- Spending and wage growth argue for BoE hike says Pantheon.
- But GBP caught in the headlights of Westminster's Brexit bus.
- Risk of lower GBP short-term as PM's resignation adds uncertainty.
- But some forecast orderly Breixt, GBP recovery ahead of year-end.
The Pound recovered its poise on Friday as the Dollar weakened although the British currency was aided during the morning session by an April retail sales number that surpassed market expectations.
UK retail sales were unchanged in April, with 0% growth, which did no harm to the Pound because financial markets had been looking for a 0.3% decline to follow on from the lofty 1.1% gain seen back in March.
Retail sales have grown strongly in 2019, with respectable numbers emerging for each month of the first quarter. And Friday's data puts the retail sector in a good starting position for the second quarter.
Sales in clothing stores, petrol stations and at online retailers was offset during the month of April, by falls in spending within other categories, the Office for National Statistics says.
"April’s retail sales figures are a timely reminder that political uncertainty is having no discernible impact on households’ overall spending. The stability of volumes in April is a good result, following recent strong gains; volumes rose by 1.7% on a three-month-on-three-month basis. Admittedly, warmer-than-usual weather—average temperatures were 1.1 degree Celsius above their 1970-to-2018 April average—probably temporarily stimulated clothing sales," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. "Nonetheless, the underlying trend should remain healthy."
Above: Pantheon Macroeconomics graph showing UK inflation, wages and retail sales.
Markets care about sales data because it provides insight into the likely pace of growth in a given period and momentum within an economy is an important determinant of the inflation pressures that dictate interest rate policies.
Changes in interest rates are normally only made in response to movements in inflation but impact currencies because of the push and pull influence they have over capital flows, and their allure for short-term speculators.
"The surprisingly upbeat retail sales figures are down to sustained online spending, perhaps boosted by falling unemployment. A close look at the detail shows high street chains and department store sales are struggling, reflecting the store closure and job loss headlines we've seen recently,” says Lee McDarby, director international payments for corporate clients at Moneycorp.
Rising consumer spending comes at a time when inflation has returned close to the Bank of England (BoE) target of 2% and as growth in workers' wage packets is picking up. Wage growth reached a post-financial-crisis high this year.
It also comes at a time when the Bank of England is concerned that pay growth will soon lead to higher levels of inflation. The BoE has warned for some time now that it needs to raise interest rates over the coming quarters.
However, for the time being, the BoE is being prevented by the Brexit farce in parliament from lifting borrowing costs for companies and consumers. Financial markets have given up betting on a BoE rate hike coming this year.
"The Brexit saga has only had a modest impact on households’ confidence in the outlook for their personal finances, which remains in line with its long-run average. Households, therefore, looks set to sustain GDP growth at a slightly above-trend rate this year, convincing the MPC to raise Bank Rate again towards the tail-end of this year," says Pantheon's Tombs.
Tombs, who has been ranked by Bloomberg and Reuters as the UK's number one economic forecaster, says UK wage growth likely peaked in the first quarter of 2019 but forecasts that it should remain strong enough to support a "solid" upward trend in retail sales this year.
Above: Pound-to-Dollar rate shown at daily intervals.
The Pound-to-Dollar rate was quoted 0.16% higher at 1.2684 following the release Friday but is now down 0.46% for the year-to-date. Pantheon's Tombs forecasts the Pound-to-Dollar rate will finish 2019 at 1.32.
Friday's price action comes amid a broad retreat by the Dollar, although it remains to be seen if this will last and many analysts are forecasting lower levels for Sterling in the short-term.
"We are seeing customers are increasingly focused on risk management and where appropriate looking at longer hedging periods. Underlying this trend is the steady trimming of odds for a no deal Brexit, bearish forecasting for Sterling and resulting predictions by some banks for 1.25 against the Dollar in the near future," says Glenn Uniacke, a Moneycorp colleague of McDarby's.
The Pound-to-Euro rate was 0.11% higher at 1.1335 after the release and has risen 1.97% in 2019.
Above: Pound-to-Euro rate shown at daily intervals.
Fridays data came around the same time Prime Minister Theresa May said, in an emotional address, that she will resign from office on June 07, 2019 and that a Conservative Party leadership contest will begin afterward.
Mrs May's resignation follows a chaotic week in which the Prime Minister offered opposition MPs an opportunity to force a further Brexit referendum and to dictate the terms of the future UK-EU customs relationship if they support a bill aimed at ratifying her EU withdrawal agreement.
The pitch to Jeremy Corbyn's opposition Labour Party has so-far gone down like a cup of cold sick on the Conservative Party backbenches and risks seeing the PM lose even more of her own MPs than she gains from the opposition on the fourth attempt at securing a majority for the withdrawal treaty.
Analysts and investors are now turning their attention toward the next likely leader and how the governing Conservative Party might perform in a general election that some say is now inevitable.
"A new Brexiteer leader would need to win back nearly all of the former Conservative voters who have switched to the Brexit party to replicate the 42% vote share won by Mrs. May in 2017, which wasn’t enough for a majority. Granted, the threshold for success varies according to how other parties perform; Labour is struggling to maintain support from the broad coalition of Leavers and Remainers that enabled it to win 40% of the vote in 2017," says Pantheon's Tombs.
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