British Pound Powers Higher as Best Retail Sales Data Since 2014 Casts Doubt on Brexit Negativity

UK retail sales key for British pound

Pound Sterling bagged a rare weekly advance against many of its major competitors thanks to some better-than-forecast economic data which suggests the impact of the Brexit vote may be less severe than initially anticipated.

Once again UK analysts and currency traders have been wrong-footed by UK data, betraying a negative post-referendum bias. 

We warned that the pessimism should be guarded against and saw risks skewed to the upside for Sterling as a result. 

Consensus estimates are for a reading for growth of 0.2% to be delivered for July, an improvement on the previous month’s decline of 0.9%.

The actual result was growth of 1.4%. Annual retail sales growth now stands at 5.9%, ahead of expectations for 4.3%.

In fact, this is the highest rate of growth since 2014:

UK retail sales July

"With Brexit related uncertainty prevailing in the UK economic outlook it seems consumers remain unperturbed, increasing spending in good July weather as sunny conditions continue to burn through the stormy clouds of post-Brexit Britain," says Tom Floyd, Senior Sales Trader at Foenix Partners.

The impact on the Pound reflects the margin expectations were beaten by. 

GBP/USD broke above the 1.31 threshold above the USD and 1.16 against the Euro following the release of some strong UK retail sales data on Thursday the 18th August.

The rally off the multi-year lows towards 1.2850, registered at the start of the week, confirm that this level is now turning into a solid line of support, and we would expect the GBP/USD to remain above here going forward.

Traders will be betting that initial post-referendum forecasts may need to be revised, including thsoe made by analysts at the Bank of England.

If this is the case, then we would expect no further interest rate cuts, and quantitative easing to be left unchanged at current levels.

"Did the Bank jump the gun? PMI survey data has been weak but the harder evidence from the high street looks a lot more promising. These numbers will make the MPC think twice about further easing," asks Neil Wilson, Markets Analyst with ETX Capital.

All this is positive for Sterling.

Nevertheless, there are no shortage of analysts suggesting that the bounce will be short-lived in nature:

Trevor Charsley, senior markets advisor at brokers AFEX, says the GBP's rally will probably be short lived as the wider consequences of Brexit remains unclear and further monetary easing is still on the horizon.

"We see the potential for the pound to fall to 1.2000 against the dollar by the end of the year."

Latest Pound / US Dollar Exchange Rates

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Analyst Views on the Data

Richard Kelly at TD Securities says he sees no recession, but long-term damage has been done:

"At this juncture, we still see a 60% chance of a recession in 2016H2 (with 16Q3 growth at -0.2%q/q), but note that risks from robust July retail sales and any timing effects that result in weak
Q3 imports could keep growth afloat above zero.

"From a policy perspective, though, it’s not about whether or not the UK enters into a mild recession—the important fact is that Brexit has damaged the country’s medium– and long-term growth trajectory."

Lloyds Bank are not convinced by the strong result:

"A strong outturn in the first post-referendum official activity data by itself should not dismiss expectations that an easing in growth is in prospect for the UK.

"To be sure, the bigger drag from the increased economic uncertainty is expected on business investment.

"Nevertheless, consumer spending is also likely to suffer in time, with a drag on real income growth in part reflecting quickening inflation."

Daniel Vernazza, Lead UK Economist at UniCredit Bank:

"Many of those people who voted to leave the EU did not expect the result to damage the UK economy – so these people are unlikely to cut back on spending sharply in the near term, and today’s retail sales report supports this view."

Andy Scott, economist at HiFX comments:

"The figures bode well for GDP in the current quarter and will go some way to offsetting the slowdown being seen in manufacturing and the service sectors. Sentiment is key to avoiding a prolonged downturn or recession and the consumers willingness to spend would point to it holding up well.

"The economy ended the previous quarter on a solid footing with growth of 0.6%, very low inflation, a solid labour market with rising wages. The economic data so far indicates that the impact from Brexit has limited and may be somewhat temporary as businesses adjust to the prospect of the UK having a different relationship with the EU."

Our pre-Release Assessment

Will it be three out of three for this week’s UK economic data series?

Thus far we have had better-than-forecast inflation and employment market data, now eyes turn to the mighty UK consumer.

While Britain may not be great at exporting anymore, we certainly are top of the pile when it comes to spending.

Even if that spending is funded by our ever-growing personal debt pile.

Whatever the case, retail sales are central to the UK’s service sector which accounts for in excess of 80% of the UK economy.

Has the Brexit vote impacted retail sales to the degree that many economists expect?

Consensus estimates are for a reading for growth of 0.2% to be delivered for July, an improvement on the previous month’s decline of 0.9%.

No doubt, the improved picture will have something to do with the sudden appearance of summer in July.

If the estimate is trumped then we would have to say 1) The boost from the weather was greater than expected, and/or 2) the fallout from the Brexit vote has been overestimated.

The latter could well be the case as many big-name analysts were quite clear in forecasting a recession in the second half of 2016.

They therefore need the retail numbers to be in negative territory if their forecasts are to have a shot.

The data are released at 9:30 London time.

For the Pound, we would expect a beat of estimates to have a positive effect and allow the currency to crystallise support above 1.30 against the US Dollar and 1.15 against the Euro.

If the data were to be weak we would expect these levels to be tested.

However, a break below these levels remains unlikely in our view; indeed many are now saying the worst of the great British Pound decline of 2016 is now behind us.

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