Sterling slipped back below the 1.70 level against USD GBP/USD yesterday afternoon following another softer-than-expected UK data point and the best US initial jobless claims number since 2006. This was the lowest level for the pair in a month. Sterling also slipped beneath the 1.26 level against EUR GBP/EUR through the afternoon.
Retail sales slipped in pace through the month of June, the ONS reported yesterday. Overall sales rose by 0.1% on the month against an expectation of a 0.3% increase. Clothing retailers held off on price discounts – part of the reason for the recent tick higher in inflation too – but this will not do anything to damage interest rate hike expectations. Momentum in the UK economy remains strong through Q2 and we will find out just how much the UK economy has grown in the 2nd quarter this morning. We do expect a strong bounce back in retail sales next month as shown by yesterday’s strong Confederation of British Industry announcement and anecdotal evidence of increased price-cutting activity on the high street.
Today’s UK GDP announcement may be enough to stop the near term sterling rot should it print the expected 0.8% QOQ increase. We are at pains to emphasise that this GDP reading is a preliminary, first glance at the UK output picture. Only around 40% of the total surveys used to measure activity will be in the hands of the ONS and, as such, there is the possibility of revisions later down the line.
We were originally very bullish on this quarter but as the data has presented itself we have become a little more cautious. June’s contractions in both industrial and construction output, alongside yesterday’s retail sales disappointment, gave us reason for pause. Having started out thinking that growth could be as high as 1.0%, we are pencilling an initial reading of 0.8% with a bias to an upside surprise.
We do believe that dips in GBP/USD pairs will be bought up but are glad the recently over stretched levels of sterling pairs – particularly against the USD – have softened. Our longer term belief remains that GBP will exhibit strength in the 2nd half of the year, especially against the euro, but a run higher in the USD in its crosses will cause GBP/USD to trade back towards 1.65.
Yesterday’s initial jobless claims number continued the recent trend of strong US jobs reports. Only 284,000 claims were made last week, the lowest level since February 2006. Shutdowns at car manufacturing plants that take place in July will have caused this rather strong fluctuation but the 4 week blended number has now fallen to 302,000; another low not seen since before the global financial crisis. Dollar has pushed higher across the board as a result and sits ready to capitalise on weakness in other crosses. Important technical levels in GBP/USD, EUR/USD and USD/JPY are in close proximity to early trade and could easily be tested through the session.
Euro will likely be guided by German IFO today following a good data day yesterday. This week’s run of preliminary PMIs from the Euro area have shown growth levels that we have not seen since 2011. Both manufacturing and services sector surveys rose higher in July and will give hope to those who believe that the European economy is not in as dire state as previously thought. While this was the 13th consecutive monthly gain, the strength of this month’s expansion has galvanised hopes that the European Central Bank’s recent, renewed stimulus efforts will be enough to promote increased business and consumer confidence.
Of course, there is a long way to go and one month’s data will be not be taken to heart too easily. If it can translate to GDP growth of even only 0.4% then it will be treated as a success.
