Pound Sterling Today: PMIs, Retail Sales to Dictate Direction against the Euro and Dollar into the Weekend

- Retail sales beat expectations
- PMIs confirm strong economic rebound underway
- GBP looks for a weekly advance vs. USD & EUR

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The British Pound found support ahead of the weekend following the release of two important data readings that confirmed a significant economic recovery is underway, however with the UK economic rebound apparently already well priced into the currency's value any big directional shifts are unlikely.

The highlight of the week was the release of IHS Markit PMI data which gave a snapshot of how the economy had performed earlier in May, making it the most up-to-date major survey data release available to markets.

The outcome pointed to a strong rebound in growth but it was ultimately not enough to encourage a more sustained bid in the Pound given numbers came in largely as expected, although the key services sector element of the release disappointed against expectations somewhat.

The Services PMI reading for May stood at 61.8 which is slightly less than the 62.2 forecast but above the 61.0 reported in April. Granted, there were only roughly three days of survey data available to account for the third major step in reopening which took place on May 17.

The Manufacturing PMI however easily beat expectations at 66.1 (vs 60.8 expected) and was higher than the previous month's 60.9.

Balancing the two readings to account for their share of the overall economy gives us the Composite PMI which read at 62.0, which is ahead of the 61.9 the market was looking for and the 60.7 reported in April.

IHS Markit says the rate of expansion was the fastest since the UK Composite Output Index began in January 1998, reflecting strong contributions from both manufacturing and services activity.

Although the headline figures were positive, there were warnings that inflationary pressures were starting to mount.

The PMI survey showed cost pressures were the strongest for nearly thirteen years.

Accordingly, subsequent efforts to protect margins resulted in the sharpest increase in average prices charged by UK private sector firms since this index began in November 1999 said IHS Markit.

Looking at the inflationary aspect of the report reveals something interesting that the Bank of England might want to note:

"Manufacturers mostly commented on price pressures due to shortages of raw materials and high shipping costs, while service providers often noted increased staff salaries."

The Bank of England is of the opinion inflation will ultimately prove transitory as global factors - such as fuel costs and supply shortages - will ultimately come to end.

But that staff salaries are increasing is not necessarily in their predictions for inflation as they note significant 'slack' in the economy.

Rising staff salaries imply a more sustained impact on inflation and this could be something the Bank of England might have to acknowledge if reflected in official data over coming months.

If it is then the market will likely price in a sooner-than-currently-expected Bank of England interest rate rise, which would be bullish for the Pound if the Federal Reserve and European Central Bank sit on their hands.

Retail sales figures for April were released ahead of the PMIs and they comfortably beat expectations and aided an early rise in the Pound. 

Retail sales rose 9.2% month-on-month in April says the ONS, which is ahead of the 4.5% consensus expectation and an increase in the 5.1% reported for March.

Retail sales rose 42.4% year-on-year in April, ahead of expectations for 36.8% and a sizeable leap on the 7.2% reported for March.

The large annual figure owes itself to 'base effects' - a year ago retail sales fell off a cliff as UK lockdowns took hold.

Following the data the Pound-to-Euro exchange rate rose to 1.1610 and the Pound-to-Dollar exchange rate rose to 1.42. The weekly performance currently stands at +0.11% +0.72% respectively.

Above: A discernible rise in GBP/EUR was seen at the 07:00 AM retail sales release. 

Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more.

We noted at the start of the week that the Pound is becoming increasingly reactive to data, an observation confirmed by Wednesday's uninspiring inflation figures which triggered some losses in value.

Friday's PMI survey offers investors the most up-to-date snapshot of the economy's performance with the beat on what the market expected likely to Sterling into the weekend.

"The UK is forecast to record its strongest GDP growth since the 1940s this year, which has given the pound an edge over many of its major peers year-to-date. If the flash PMIs support this notion, then sterling could end the week stronger," says George Vessey, UK Currency Strategist for Western Union Business Solutions.

Foreign exchange markets have fallen into tigh ranges of late and therefore it is unlikely the final major UK data releases for May will shift the dial on Sterling's direction.

Any initial reactions will likely be faded as the broader market awaits the next major directional pulse.

Nevertheless, the Pound remains relatively well supported with Danske Bank analysts saying in a new foreign exchange research briefing that their constructive view on the British Pound in the 12-month timeframe rests on an expectation that the UK economy will outperform that of the Eurozone.

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"The UK is gradually reopening supported by fast vaccinations, which, combined with businesses getting used to the new EU-UK trading relationship, means that the outlook for the UK economy looks much brighter. We expect the UK economy will outperform the euro area this year," says Mikael Olai Milhøj, Chief Analyst with Danske Bank.

The UK economy is due to fully open on June 21 as this is the date the government is expected to drop all remaining covid-related restrictions.

The UK's exit from these lockdown restrictions however rests with an assumption that a spike in cases of the virus and attendant hospitalisations are avoided.

Concerns over the Indian variant have dominated discourse in the UK over recent weeks but media reports the government is increasingly confident the variant will not blow the reopening programme off track with data suggesting it is not notably more transmissible than previous variants.

The Times says hospital admissions are "fairly flat" in variant hotspots, and preliminary estimates suggest the variant has a smaller increase in transmissibility that would not risk overwhelming the NHS if restrictions ended next month.

Prime Minister Boris Johnson told parliament mid-week that new data suggested vaccinations offered effective protection against the variant, which has become the dominant strain of the virus in some parts of the country.

"We have increasing confidence that vaccines are effective against all variants, including the Indian variant. In this context, I want particularly to thank the people of Bolton, Blackburn and many other places who have been coming forward in record numbers to get vaccinated – to get their first and second jabs. I think that the numbers have doubled in Bolton alone," he said.

"Sterling has found support from the UK’s vaccine roll-out relative to other major economies," says a note from the NatWest Markets foreign exchange team in a monthly research briefing.

"While the pace of rollout has been a factor, it’s the UK economy’s underlying sensitivity to the vaccine that has been the most important aspect," they add. "The UK has suffered the greatest hit to GDP of the developed economies during the pandemic and therefore has the most to benefit from the easing of restrictions."

NatWest forecast the Pound will remain supported over coming weeks but it could start losing ground against both the Euro and Dollar towards the middle of the second half of 2021 as its initial outperformance advantage is fully digested.