UK Retail Sales Blowout Fires Up British Pound’s Rally, But is GBP Advance Now Overdone?

UK retail sales beat expectations and push GBP higher

Pound sterling has made a fresh bid for fresh highs courtesy of data that confirms suggestions that that UK economy is slowing down is an exaggeration.

The pound to euro exchange rate surged through the 1.30 barrier for the first time since early February, offering those with euro-based payments the rare opportunity to exchange in the 1.2688 - 1.2596 region for the first time in months.

The pound was bought after it was shown retail sales grew 1.3% in April, well ahead of consensus forecasts for 0.5%.

The improvement on the previous month’s -0.5% was marked.

The UK consumer is a powerful driver of the economy and markets believe this is confirmation that they may have been too pessimistic on the economy’s prospects over recent weeks.

“After shoppers stayed away from the high street in March, Mark Carney and his BoE colleagues will be delighted to see that retail sales figures have rebounded strongly in April,” says Dennis de Jong at UFX.com.

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The figure may have been even higher if it wasn’t for a weak set of results coming out of Scotland.

A steep drop in non-food sales, particularly clothing and footwear, north of the border has seen the worst year-on-year decline in retail sales since 2008.

Nevertheless, “this stronger performance looks fairly plausible. After all, there are few signs that Brexit uncertainty is having a big adverse impact on consumer confidence. And real pay growth is still solid. Indeed, consumer spending should prevent the economy from slowing too much this quarter, even if referendum uncertainty has a bigger impact on business confidence and investment,” says Vicky Redwood at Capital Economics.

Was the Data THAT Good, is the Pound Overbought?

We have noted a number of indicators suggesting some GBP pairs are now extremely overbought, particularly the GBP/AUD rate.

In line with this we are wary that sterling's advance could end soon.

Analyst Jeremy Stretch at CIBC in London agrees saying the retail sales data was not as great as is being made out by some analysts:

"While there are a number of seasonal distortions around Easter we would be wary of extrapolating the uptrend in monthly sales reported by the ONS. While sales volumes may have increased by 1.5%, looking at the 3m on 3m trend, which is more reflective of long term trends is rather less robust, on that basis the series moderated to 0.7% from 1.1%."

Stretch says expect overhead resistance at 1.4670 to contain GBP topside.

"We would regards recent GBP gains as looking increasingly overdone," says the CIBC analyst.

The Pound Pushes Fresh Highs, Breaks Through Notable Barriers

We have seen some notable moves in the British pound exchange rate complex over the past 24 hours with the spike seen following the release of the Ipsos Mori poll on the EU referendum helping break a raft of technical barriers.

In both the GBP/EUR and GBP/CAD the 100 day moving average has been broken ensuring a good deal of resistance in these two markets has been cleared aside.

This could allow the pound freedom to advance further.

Positioning by speculators and corporates is neutral according to the latest CFTC data at hand; this tells us there are many more market participants on the sidelines who will be able to step into the market and bid sterling notably higher.

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