- Analysts look for a sharp rebound for UK retail sales in today’s April release
- US Philly Fed Manufacturing Index on track to signal moderate growth for May
- GBP/USD’s rally is supported by political factors, on both sides of the Atlantic
Britain’s economy is in the spotlight again today via the April update on retail spending. We’ll also see another early clue for US manufacturing activity in May with the release of the Philly Fed manufacturing data. Meanwhile, forex traders are wondering if the recent rally in GBP/USD will carry it decisively above $1.30 in the near term.
UK: Retail Sales (0830 GMT): Consumer spending has hit a soft patch recently, but relief is expected in today’s April update.
Econoday.com’s consensus forecast sees retail sales rising 1.5% for the monthly comparison, a strong turnaround from March’s 1.8% decline. More importantly, the year-on-year trend is projected to perk up in April, advancing 2.2% vs. the year-earlier level, up from 1.7% previously.
If the outlook is accurate, news of firmer growth will alleviate, if only slightly, concerns that stronger inflation is taking a toll on retail sales. The consumer price index accelerated to a 2.7% annual gain in April, touching a 3-1/2-year high. Analysts attribute some, perhaps most of the slowdown in retail spending in this year’s first quarter to higher inflation.
That’s still a risk factor, but today’s numbers are expected to show that inflation’s bite may be less painful than some forecasters anticipate.
Last week’s release of the British Retail Consortium-KPMG retail sales monitor certainly looks encouraging, pointing to a a 5.6% year-on-year gain in spending for April – up sharply from March’s 1.0% slide. Note, however, that the bounce may be due to the timing of the Easter holiday, which arrived late this year.
Whatever the reason, today’s official update on retail sales from the government is widely expected to bring good news. It’s debatable if this will be a one-off event, but for today at least the retail profile appears headed for a bullish glow.
US: Philadelphia Fed Manufacturing Index (1230 GMT): Earlier this week the New York Fed reported that its index of manufacturing activity in its region fell in May – the first monthly decline since last October. Will today’s update of the Philadelphia Fed’s manufacturing benchmark for this month stumble too?
Another round of red ink would raise concern that this year’s rebound in manufacturing output generally is weakening in the second quarter. The cognoscenti on macro matters, however, expect that today’s report will dispense a relatively upbeat dose of data. The Philly Fed index is projected to decline slightly for May vs. the previous month, but remain comfortably in positive territory – 19.6 vs. 22.0 for April, according to Econoday.com’s consensus forecast.
Good news, assuming the estimate is accurate. Nonetheless, the April profile on US manufacturing via PMI survey data hints at a slowdown brewing. IHS Markit’s headline index for the sector remained in a growth mode last month, but the Manufacturing PMI eased in April, reflecting the softest improvement since last September.
Is the latest PMI downshift noise? Possibly, although a materially bigger-than-expected decline in today’s update from the Philly Fed would raise new questions about the outlook for manufacturing.
GBP/USD: Sterling has strengthened against the dollar in recent weeks. One of the catalysts, arguably the main catalyst: expectations that next month’s general election will boost the Conservative party’s majority in Parliament, providing a degree of stability for the government during the Brexit negotiations.
Whatever the source of buying, GBP/USD’s technical profile is looking modestly bullish lately – a sharp contrast to previous months. In mid-day trading on Wednesday, the pound was changing hands at roughly $1.294, close to the highest level since last autumn.
Forex analysts warn that the rally will soon hit a wall and reverse. The reasoning: the expected triumph of the Conservatives on June 8 is fully priced in. A run of strong economic data could extend the rally, but hints of a softer labour market – the claimant count rose for a second month in April – suggest otherwise. Then again, today’s retail sales report, which is expected to reflect a rebound in growth for April, could breathe new life into GBP/USD.
If sterling manages to rise above $1.30, sceptics will be forced to rethink the case for a reversal in the near term.
Meanwhile, don’t underestimate the potential for weakness in the US dollar linked to the ongoing political storms raging around US President Donald Trump. “We have an environment now where we don’t speak about fiscal stimulus any more [for the US], we don’t talk about corporate tax cuts any more,” a Commerzbank analyst told Bloomberg yesterday.
The storm that's rocking the White House could pass, of course. In the meantime, anxiety is rising as US political uncertainty rises.
For the near term, at least, sterling is a beneficiary. 
Disclosure: Originally published at Saxo Bank TradingFloor.com