Sterling claws back ground after solid United Kingdom retail sales

Irving Hamilton
August 19, 2018

The yearly number came at 3.5%, up from 2.9% expected.

As the monthly measure of inflation stagnated investors saw limited cause for confidence on Wednesday morning, especially in the wake of recent United Kingdom average weekly earnings figures.

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The Pound (GBP) meanwhile is trending narrowly against the rest of its peers this morning, despite an uptick in inflation.

With that said, the ongoing negotiations surrounding the Brexit process may continue to sway the exchange rate as the BoE delivers a dovish rate-hike earlier this month, and the British Pound remains at risk of facing headwinds over the remainder of the year as the Monetary Policy Committee (MPC) warns that 'any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent'.

However markets were left nearly completely unfazed by the release, as the slight rise in inflation is not seen as having an impact on the Bank of England's (BoE) cautious outlook towards further interest rate hikes.

'Importantly, fuel costs have begun to stabilise, and the price of petrol, in fact, fell by 0.6% last month.

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Friday will see the publication of the Eurozone's final July Consumer Price Index (CPI) results. Monthly core retail sales jumped by 0.9% against 0% expected, while yearly sales increased by 3.7% against 2.8% expected.

GBP/USD pares the decline from earlier this week as United Kingdom household spending expands 0.9% in July, and signs of stronger consumption may keep the Bank of England (BoE) on track to further normalize monetary policy as 'recent data appear to confirm that the dip in output in the first quarter was temporary, with momentum recovering in the second quarter'.

On the other hand, another weak months of sales would highlight the more vulnerable nature of the economic outlook, to the detriment of Sterling. Note that the recent sell-off was accompanied by above-average trading volumes - a sign that bears remain in control.

If the situation in Turkey continues to escalate, though, Euro exchange rates could see further weakness.

On top of that, Thursday saw the publication of the Eurozone's June trade surplus update, which was stronger than expected and gave the Euro further support.

'Even though the global economy picked up from the soft patch in the Jan-Mar quarter, the global economy lacks momentum with the exception of the USA economy, as evidenced by the slowdown of the Eurozone and Chinese economies in the Apr-Jun quarter. Currency traders will be hoping next week's talks between the USA and China can ease trade tensions between the two juggernauts that caused investors to flee emerging market currencies and flock to the safe havens. This would bolster Euro demand.

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