Pound Sterling Bats Away Retail Sales Disappointment

• Pound to Euro exchange rate: 1.1954, day's low: 1.1915
• Pound to Dollar exchange rate: 1.2785, day's low: 1.2780

Pound Sterling was put on the back foot ahead of the weekend following the release of some below-expectation data from the UK economy.

The ONS reported that UK retail sales for March slipped by 1.8%, a figure that was far below the -0.2% forecast by economists.

However, the currency soon recovered just as we said it would when we first produced this report. Our argument is that Sterling is a political currency at present and the impact of data will be less severe as was the case over recent weeks. More on this below.

Providing some comfort for Sterling was news that the data for February was upgraded to show growth of 1.7% from a previous 1.4% in the previous month.

Nevertheless, the signs are clear - the UK consumer is withdrawing and the data confirms a broader trend of slowing retail sales which we have seen since December 2016.

The main argument for the decline is that rising inflation is putting the pinch on consumer spending habits in the UK.

The ONS reports that average store prices (including fuel) increased by 3.3% on the year, the largest growth since March 2012; the largest contribution came from petrol stations, where year-on-year average prices rose by 16.4%.

Above: As inflation picks up, so retail sales fall.

“Today’s retail sales figures show a decline on the month and on the three months to March, which coincides with quarter 1 in 2017. This is the first time we’ve seen a quarterly decline since 2013, and it seems to be a consequence of price increases across a whole range of sectors," says Kate Davies, ONS Senior Statistician.

However, we note too that 2016 was an exceptional year for retail sales and there was always likely to be a slowing down in activity as consumers can't keep raising their spending in the face of wages rises that are effectively being neutralised by price rises.

March’s drop in UK retail sales suggests that the consumer spending slowdown is gathering pace and adds to other evidence indicating that the economic recovery has slowed since the end of last year,” says Ruth Gregory at Capital Economics. “Indeed, consumers appear to be increasingly feeling the adverse effects of sterling’s fall, with the retail sales deflator having risen from -2.8% a year ago to +3.3% in March.”

Some caution for the bears though. Gregory warns that some fall back in retail sales volumes after February’s (upwardly-revised) 1.7% monthly surge always looked likely.

“And these figures are likely to be overstating the weakness in overall household spending growth in Q1 – of which retail sales only makes up a third – with spending off the high street seeming to have held up rather better,” says Gregory.

Capital Economics think that overall household spending will only slow gradually this year – from 2.8% in 2016 to 2.0% in 2017 – rather than collapse outright.

But, Pound's Losses Could be Limited

We do however suspect that Sterling's losses will be contained on the back of the data release.

This rests largely on the view that the Pound has become a political currency once more thanks to Theresa May's calling of the June 8 election on Tuesday.

Therefore, the weight of data in determining the currency's moves has become limited.

Expect focus to remain poltical going forward, particularly against the Euro which is likely to take guidance from this weekend's vote in France.

"Sterling was the top performer in our sample this week, based entirely on the UK snap election announcement. The market bid sterling in the expectation that an enlargement of the Conservative majority in the UK parliament will facilitate a smoother negotiated Brexit," says Kit Juckes, an analyst with Societe Generale.