Data this morning showed that UK retail sales rallied in October by 0.6%, despite a bleak overall picture of the UK economy. The result was a real surprise; market expectations were of a 0.2% contraction.
Today’s data is certainly a positive; retail sales are a very important economic indicator and 0.6% growth is a strong showing indeed. With consumer inflation up at 5.0% and a consumer confidence survey last night hitting new record lows, the market was certainly caught off guard. The figure can be attributed as the result of consumers trying to get ahead, utilising some unusually early Christmas promotions and discounts.
However, the market will remain sceptical. The figure doesn’t really change the overall picture of the UK economy. It probably says more about UK retailer’s desperation than it does about improvements in household balance sheets and spending power. The market will take a great deal more convincing that the UK economy is not heading for tougher times. The chances are we will see retail sales figures fall off later on in the quarter.
Sterling’s response has been pretty limited. Sterling tried to rally on the back of the retail sales figure, but gains were short-lived. The market has accepted that it is a matter of when, not if, we will see a further expansion of the Bank of England’s quantitative easing programme. In this context, where interest rate hikes are off the table, sterling looks hard-pushed to make significant gains off rogue growth figures. External factors in the eurozone are providing much more direction in the exchange rates than economic data at present. Data may not boost the pound but heightened global economic concerns will do.
So, whilst the UK economy is looking its weakest in a long-time, the prospects for the pound are looking their rosiest in a long-time. The pound’s quasi safe-haven appeal, due to the popularity of UK gilts, is pushing it higher against most currencies other than the yen and US dollar and looks likely to continue benefiting from the prevailing risk-off environment.
Richard Driver
Analyst – Caxton FX
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