GBP/USD Could Fall Back Towards 1.9900 On Dour UK Retail Sales

SEP 20
UK Retail Sales (MoM) (AUG) (4:30 EST; 8:30 GMT)
UK Retail Sales (YoY) (AUG) (4:30 EST; 8:30 GMT)

Expected: 0.0%
Expected: 4.0%

Previous: 0.7%
Previous: 4.4%

How Will The Markets React?
On Thursday, UK consumption data is scheduled to be released, and the results may not be pretty. Retail sales during the month of August are expected to have fallen flat, bringing the annualized rate down to 4.0 percent. A decline in spending growth has been expected for a few months now, as the Bank of England’s aggressive monetary policy tightening cycle takes its toll. Indeed, since August 2006, the central bank has raised rates five times to bring the overnight lending rate to a six-year high of 5.75 percent as Mervyn King and his fellow policy makers fight inflation and help to cool the booming housing sector. This is likely to impact consumption as well, and according to Bank of England Deputy Governor Sir John Gieve, this isn’t exactly a problem for the central bank. Back in July, he told the Nottingham Evening Post: “There are some signs that the past interest rates may be coming through in consumption and housing, but it is not clear cut yet?If we saw a bit of a switch into stronger investment and exports and slightly weaker consumption, that would be no bad thing.” We will likely see our first bit of proof in the August retail sales report, and with UK retailers such as French Connection and Next warning that they are expecting sales during the third and fourth quarters to fall back, the outlook remains bleak.
Bonds - Long Gilt Futures
Gilts have dipped quite a bit in recent days to test the 107.20 level, and if the contract breaks that level in coming days, there will be considerable scope for further weakness as things are still quite bearish now. Returning to 107.00 would appear to be only a matter of time with impressive volume adding to the weight of selling pressure. Furthermore, as equity markets continue to calm and rack up gains, traders may pay no heed to Thursday’s UK event risk, as retail sales are anticipated to soften. However, if the data proves to be remarkably disappointing, Gilts could bounce higher.


FX - GBP/USD
The British pound was hit hard by news that Northern Rock would need to be bailed out by the Bank of England last Friday, and while the currency gained somewhat as the UK government guaranteed the funds of the financial institution’s depositors, one thing is clear: the BOE cannot afford to raise rates any further. Fortunately for them, inflation pressures have eased somewhat, with the August CPI reading falling to an annualized rate of 1.8 percent from 1.9 percent. The uncertainty in the financial markets along with gloomy growth prospects also provide no leeway for the central bank to raise beyond the current rate of 5.75 percent. The release of retail sales on Thursday will likely reiterate that sentiment, as they are anticipated to have fallen flat during the month of August. The news could help push GPBUSD even lower to test trendline support and the recent lows near 1.9900, especially if the data is worse-than-expected. However, if retail sales actually prove to be relatively resilient, Cable could rebound to work towards 2.0150.


Equities - FTSE 100
The FTSE 100 rallied sharply, following the lead of Wall St. after the Federal Reserve unexpectedly cut rates by 50bps to 4.75 percent and slashed the discount rate 50bps to 5.25 percent. However, resistance looms just above at the 78.6 percent Fib of 6,754.10 - 5,821.70 at 6,554, so further gains for the index may be limited in the near-term, especially as the release of UK retail sales will add event risk. Sales are anticipated to have slowed during the month of August, which bodes ill for economic expansion, especially as a massive downturn in the UK housing sector is widely expected. As a result, if retail sales prove to be very disappointing, the FTSE 100 could actually ease back below 6,400. On the other hand, if the data is actually stronger-than-expected, the index could be pushed to target 6,554.

Written by Terri Belkas, Currency Analyst for DailyFX.com