UK Retail Sales Top Analyst Expectations

The British Pound found fresh buying interest following the release of better-than-forecast retail sales data from the ONS on Thursday, August 17.

The ONS reported monthly retail sales read at 0.3%, ahead of forecasts for a reading of 0.2%.

The positive impact on Sterling was however muted by a downgrade to the previous months day from 0.6% to 0.3%.

Nevertheless, "the upward surprise to sales in July provides some support to the view that the UK’s consumer-driven growth continues to show signs of resilience in the face of the uncertain political outlook," says a note in response to the data from Lloyds Bank.

The downgrade to the previous month's data might explain why the Pound rate spiked to 1.2907 on the release before falling right back to 1.2889 once the full picture had been taken in.

Algorithmic trades reacting to the headine data will certainly be behind the spike with cool heads taking the Pound back to earth as the downgrade to the previous month's data is taken into account.

The Pound to Euro exchange rate also experienced a spike that went as high as 1.0990 before it returned lower to 1.0981.

The rate is still however a quarter of a percent up on the day's open and it looks like traders are taking Sterling up to those spike highs:

This is the third piece of better-than-forecast data out of the UK economy this week with the ONS also reporting that inflation is not rising as fast as economists expected while wages are increasing at a greater rate than economists had anticipated.

Unemployment has fallen to lows not seen since 1971.

The Pound will surely find some lift as data continues to improve into the second half of the year and an entrenched negativty towards the currency is reversed.

As the below shows, it is about time some good news started flowing through:

Much of the Pound's advance on the Euro has to do with a softer Euro.

"There wasn’t really much to cheer in terms of the UK’s retail sales data. Though July’s figure did come in at a better than forecast 0.3%, that isn’t really an improvement on June’s reading, which itself was halved from the initial 0.6% growth stated last month," notes Connor Campbell at Spreadex.

Eurozone inflation meanwhile came in as expected at 1.3%, continuing the steady decline from the 2.0% and 1.9% readings seen in February and April respectively.

"The very, very slight retail sales beat gave sterling the win, allowing the Pound the jump half a percent against the Euro (though it still couldn’t cross €1.10)," says Campbell.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.

The Details and Reactions

The retail sales data is good, but not great.

Much of the increase in activity is actually a result of increased food sales; something that has been flagged up in surveys released ahead of the ONS data.

"The underlying trend at the beginning of 2017 showed a relatively subdued picture in retail sales. Strong food sales have been responsible for the growth of 0.3% in July compared with June, as all other main sectors have shown a decrease. Whilst the overall growth is the same as in June, trends in growth in different sectors are proving quite volatile," says Ole Black, Senior Statistician at the ONS.

The below confirms that the UK consumer remains highly sensitive to the recent rise in inflation:

We will need to see prices stabilise and pay rise before any meaningful pickup in retail sales.

Ruth Gregory, UK Economist at Capital Economics is optimistic on retail sales data going forward:

"With July’s monthly rise in sales volumes building on June’s robust 0.6% increase, high-street spending appears to have carried a decent amount of momentum into Q3. There have been few signs of a sharp slowdown in spending growth away from the high street either.

"What’s more, with annual retail sales values growth remaining at a still strong 4.1% in July, this suggests that consumers haven’t been tightening their belts as a result of Brexit uncertainty. Accordingly, as the effect of the fall in the pound on inflation starts to fade, there should be scope for spending volumes growth to accelerate."

However, Victoria Clarke at Investec is a little less optimistic on the outlook facing retail sales. 

Investec argue that UK inflation is now closing in on its peak; "however before this peak is reached we do expect further rises over the months ahead and even after that for inflation to take time to moderate. With no material signs of a sustained shift up in wage growth, we see real household spending power remaining under pressure."

Clarke believes the household cash squeeze will continue and this in turn will starve the Pound of the required oxygen to sustain a fundamental turnaround.