British Pound in 2nd Day of Gains v Euro on Retail Sales Data and EU Referendum Date Announcement

The pound ended the week on a strong footing thanks to strong retail sales data and news the referendum on the UK's future in Europe will take place on June 23.

The UK pound ended the week firmer against the euro, dollar and commodity dollar bloc thanks to consensus-beating economic data and positive chirps from Bank of England monetary policy decision-makers.

However, it was news David Cameron would set the EU referendum data for June 23rd that allowed sterling to end Friday's session with a flourish. 

Analysts widely see June 23rd as being preferred for a 'stay in' vote owing to it being towards the start of an expected summer surge in European immigration.

The pound has now managed to advance against the euro for three days in a row and will start the new week from 1.2929.

The pound to dollar exchange rate will start from 1.44018, against the Australian dollar sterling will start the week from an exchange rate of 2.0136.

The pound to New Zealand dollar exchange rate will commence trade from 2.17088.

Latest Pound/Euro Exchange Rates

	Live: 1.1447▲ + 0.03% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1058 - 1.1104
**Independent Specialist	1.1287 - 1.1333 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Retail Sales Smash Expectations

In normal times news that UK retail sales have blown expectations out of the water would have sent sterling sharply higher.

But, the inability of the pound to advance confirms that the EU referendum continues to skew the market. Indeed, HSBC reckon that the GBP/USD is about 7% lower than where it would be in normal times.

If the UK votes to stay in the EU one gets the sense of just how large the recovery in the pound will be.

So, with fundamental data being almost irrelevant, and the feeling that the outcome of the EU summit will have little meaningful positive effect on the pound, markets are moving the pound according to the charts.

As such we see the euro moving higher against the pound over coming days.

But let’s not ignore the good news being ignored by the markets.

Blow-out Retail Sales and Improving Public Finances

Core Retail Sales, month-on-month, for January read at 2.3%, well ahead of forecasts for 0.7% and a welcome recovery on the previous month’s reading of -1.3%.

Annual retail sales now stand at a whopping 5%! That is way above the 3.5% forecast and the 1.8% reading in the previous month.

Low inflation is certainly not seeing the UK consumer hold back in anticipation of even lower prices. If anything, shoppers are making the most of the low prices cognisant of the fact that prices will be rising in the future.

In addition to Retail Sales UK Public Sector Net Borrowing figures also came in better than expected at -11B vs. -13B eyed in yet another sign that UK fiscal finances are improving as final demand picks up.

Bank of England’s Weale Says Markets are Wrong on Interest Rate Expectations

A big downer for sterling since the turn of the year has been the realisation that interest rate rises are not going to happen anytime soon.

Sterling was bid higher through 2015 in anticipation of higher interest rates in 2016 which would deliver higher yield to global investors.

That is not the case, in fact money markets are now pricing the first rate as far back as 2019!

This is excessive suggests the Bank of England’s longest-serving Monetary Policy Committee Member Marin Weale.

On a visit to Belfast Weale told Irish News that, "I would be surprised if people had to wait as long as markets are currently implying.”

The newswires picked up on this, even as Weale tried to imply this was no hint by adding "but markets may well turn out to be right.”

"I think every member of the committee would say that we make decision about current interest rates, not the future rate,“ says Weale, “the only appropriate way of doing that is to look at the state of the economy each month or each time we meet to vote. that's what monetary policy making is supposed to be like."

So if we were to look at the economy on a month-to-month basis then an interest rate rise would be due owing to the strong retail demand and jobs data.

That said, inflation remains subdued, but again there was some encouragement from Weale who said, “if we look at core measures of inflation, those are closer to the target but still below the target.”

Core inflation strips out the external drivers such as oil prices, hence why it is higher.

But if oil prices recover, as they are expected to, then real inflation will catch up quickly.

The settings are in place for higher interest rates and a higher sterling.

If Brexit does not happen sterling will be notably higher by year-end.