Sterling Update: Pound Faces Corrections Amid Weak UK Retail Sales

Here’s the latest currency news from our partner Moneycorp, to help you find out what your money is worth.

GBP

The pound saw some corrections in value at the end of last week after Friday’s UK retail sales showed weaker-than-expected spending for June. Sales volumes dropped by 1.2% versus the anticipated -0.6%, with the cooler, wetter weather being blamed.

This was particularly surprising given the higher wages in the UK. Although the slowdown here was expected, it is still a sticking point regarding the prospect of interest rate cuts from the Bank of England and suggests that consumer confidence continues to falter.

The aftermath of the retail sales data release reduced sterling gains from earlier in the week, which saw the currency hit a two-year high against the euro and a 12-month high against the US dollar.

This move correlated with the RSI warning that GBP was overvalued during its recent rally. As global stock markets dip, demonstrating that investor sentiment is falling, the pound was always likely to appear more vulnerable.

Predictions of a cut to interest rates from the Bank of England on its August 1st meeting also continue to fall, as although wage growth is starting to slow, it still outpaces inflation. Although inflation in the UK has now fallen back to its 2% target, there are concerns that inflationary pressures are still niggling in the minds of the Bank of England Monetary Policy Committee.

A combination of these factors is leading the markets and some economists to believe the central banks are unlikely to cut interest rates from the current 5.25% until the September 19th meeting. Any surprises outside of this could cause GBP to react, so commentary in the run-up to the August 1st meeting is likely to be monitored closely by analysts and the markets.

After the volatility of the two previous weeks in currency markets, we could see a period of calmness this week as schools in England break up for the summer holidays. There were also only a few data releases of note on the economic calendar.

The latest Purchase Managers Index data came out on Wednesday and showed an uptick in the UK manufacturing sector, which has been dragging slightly behind the services sector. The data came in above expectation at 51.8 from 50.9 the previous month.

EUR

The EU and the euro have been outsiders in the markets recently, as the European Central Bank decided to hold on at its current 3.75% interest rate last Thursday – as was widely anticipated. Last week, the US dollar tended to dictate any rate movement between the two currencies, and the surprise decline to a four-month low in the German ZEW measuring economic sentiment, which failed to offer any support. The single currency recovered some ground against both the pound and the US dollar on Monday and continued to show some strength this week.

The ECB is expected to observe the impact of its previous interest rate cut on inflation before acting again. Following in the same cautious vein, President Lagarde also didn’t commit to a course of action for its September 12th meeting, saying: “The question of September and what do we do in September, is wide open and will be determined on the basis of all the data that we will be receiving” ahead of the meeting.

However, a few indications supported market expectations of another reduction in September. Among these was Lagarde’s comment in her speech afterwards that risks to growth were now “tilted to the downside.” This marked a shift from the central bank’s earlier stance, which was that it was more balanced.

On Wednesday Flash PMI data was released across Europe and added to concerns about the economic situation in single currency area. The eurozone manufacturing PMI dropped to 45.6 in the latest data release, marking a seven-month low, down from the previous 45.8. The drop was lower than expectations, with forecasts showing a modest rise to 46.0 before the data release. In Germany, the PMI fell to 42.6, reaching a three-month low, while in France, it decreased for the second consecutive month to 44.1.