UK Retail Sales Supports Sterling – 10th October 2017

UK Retail Sales Supports Sterling – 10th October 2017

During early September 2017, traders bought into Sterling on the belief that there was going to be an imminent interest rate rise from the Bank of England. On the surface, the UK economy is a long way from needing a rate hike when judged just on “traditional” measures; GDP growth is falling, business investment is more-or-less non-existent and wage inflation is stagnant. Yet, a hike is considered probable as inflation continues to climb (in part due to higher import costs from the weak pound) which looks set to break above the 3% threshold.

During the Bank of England meeting in June, the Monetary Policy Committee came close to increasing interest rates only for inflation to fall back from 2.9% to 2.6% and it is probable that Governor Mark Carney is hoping for a similar result when the data is released next week. Overnight, UK retail sales data were surprisingly strong, growing 1.9% year on year in September versus 1.3% last month. This will provide further encouragement to the market as support from the consumer is vital with wage growth stalling.

The positive retail sales number enabled Sterling to claw back some of the losses it suffered last week, getting back to GBP/ USD 1.3200 after finding support at GBP/ USD 1.3000 and GBP/ EUR 1.1200 against the Euro after finding support at GBP/ EUR 1.1100.

There has been a toughening of attitude from both sides in the Brexit negotiations with both the UK and EU telling each other that the next move is theirs. In reality, we are all getting closer to  chaos! The UK has been considered in its desire to know what kind of relationship it will have with Europe following Brexit and the EU is determined to hold out on any commitments until an agreement on budget contributions has taken place.

It seems reasonable (from UK point of view) to know what you can expect before committing to any spending. The EU however, want to make sure that they do two things; continue to receive payments they feel the UK is legally and morally required to make and to illustrate to any other waverers the tough stance they will take should there be another leave referendum in the region.

The fifth round of talks began yesterday although with no fresh impetus, there is little for the Michel Barnier or David Davis to say. The markets however, from past movements, tend to feel the EU is better placed to deal with life without the UK than the other way around.


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