British Pound is Down: BRC Retail Sales Data, Risk-Off Mood Over French Elections to Blame

Pound Sterling got off to a shaky start on Tuesday morning and we think this may have something to do with surprisingly poor Retail Sales data, which brought into doubt the resilience of the economy post-Brexit referendum.

The British Retail Consortium’s BRC Retail Sales monitor showed a decline of -0.6% in January from a previous +2.6% gain a year ago.

On a total basis, sales rose 0.1% in January, against a 3.3% increase in January 2016. This is well below the 3-month average of 1.1% and the 12-month average of 0.9%.

Whilst last year’s data was especially good and therefore hard to beat, according to BRC boss Helen Dickenson, the data was nevertheless concerning.

Analysts had expected figures to show a more modest 0.8% rise and as a consequence investors were surprised by the decline which suggests expectations for a slower year of economic growth in the UK are correct.

The Pound to Dollar exchange rate fell precipitously in the morning from the 1.2450s to 1.2350 and is below the important 1.24 area that will be key to determining the immediate outlook.

The Pound to Euro exchange rate has relinquished much of the gains made at the start of the week and trades lower at 1.1589.

Strong economic data has supported a rebound in Sterling from the October 2016 lows as the resilience of the economy has surprised economists who expected more downside after the vote to leave Europe.

Consumer data had been especially strong but the BRC data now questions whether that will continue to be the case.

One bright spot in the data was food sales which rose 0.6% in the three months to January and by 2.0% over the last 12 months, which was well above the 1.0% 12-month average.

Non-Food sales, however, suffered a more concerning slowdown, rising by only 0.2% in the three months to Jan and 0.3% over the 12 months – the lowest since 2012. This contrasted with the 12-month average of 0.8%.

“Looking across the last three months, we’ve seen the slowest growth of the festive period since 2009. Closer inspection reveals that this was driven by slowing sales in non-food sectors," says Helen Dickinson, Chief Executive at the BRC. “These figures suggest that 'caution' was top of new year shopping lists and the uptick in credit card lending at the end of the last year may be short lived."

Dickenson suggested the weak Pound could cause inflationary pressure by raising the costs of imported goods and that this might exacerbate the current slowdown.

Outlook Softens

The UK consumer is the engine of UK economic performance, and therefore 2017 rests firmly with how bullish they are felling.

There are some early signs in the official figures, too, that spending growth is losing some momentum – sales volumes fell by a monthly 1.9% in December.

"Our expectation that real income growth will slow as CPI inflation picks up to around 3% by the end of the year, suggests that spending growth is likely to slow further," says Paul Hollingsworth at Capital Economics.

However, supportive credit conditions, a resilient labour market and upbeat confidence by past standards suggests that spending should maintain a decent amount of momentum over the course of this year.

Capital Economics have pencilled in a slowdown in spending growth from around 2.8% in 2016 to about 1.8% in 2017.

“With the signs pointing to upward pressures on shop prices given rising import costs, all eyes will be on the impact of inflation on consumer spending. That said, retailers are a resilient and innovative bunch. They have become increasingly adept at responding to the challenging environment, and as a result the industry has been a key driver of recent UK productivity growth,” says Dickinson.

French Political Risk High on the Agenda

Although the BRC data might have contributed to the fall in Pound Sterling it probably could not have accounted for the whole cent drop in the exchange rate.

Instead it may be that investors are growing jittery about holding 'risky' currencies, which is exactly what the Pound has become since the Brexit vote.

Fresh concerns have emerged on Tuesday February 7 of the risks associated with the French elections.

"The safe-haven plays are once more in demand, gaining ground as politics again looks to play a key role in market moves. With concern over political risk in the Eurozone rising, surrounding the French Presidential election, the yields on French OATs have pulled sharply higher. This is putting pressure on the Euro which is beginning to weaken against the US Dollar," says Richard Perry, an analyst at Hantec Markets in London.

Ironically they are hurting the Pound more than the Euro it would seem!

But, this is not entirely surprising if we note that risky assets will suffer in times of risk-off trade and until a Le Pen victory in the second round becomes more real we would expect the Euro to be considered a safer bet than Sterling.