The pound has slightly dropped from its over two-month high which it reached this Wednesday, but the outlook remains positive with traders expecting additional gains. Researchers at Barclays also anticipate the pound to continue outperforming its major peers over the coming months.

The pound’s retreat today was not driven by any specific economic factor and could be attributed to traders readjusting their trades ahead of the all-important US consumer inflation figures.

Pound’s positive performance could continue researchers say

Markets generally believe that the pound’s strong performance in the first week of the new year was largely driven by expectations for a February interest rate hike and this could continue in the coming weeks and months.

The market now expects a ~75% chance of a second rate hike at the BoE’s February  policy meeting. This has also been further boosted by expectations that the US Federal Reserve will proceed to a faster and earlier interest rate hike cycle in 2022.

With inflation rising in both the UK and the US, markets expect higher interest rates in the US and the UK, which will support the British currency.

UK retail sales

The latest annual Retail Sales Monitor report from the British Retail Consortium (BRC) showed that sales grew, but consumer spending slowed the final weeks of 2021. The British Retail Consortium said that UK retail sales grew by 2.1% in December with growth coming in at 9.9% year on year. Government restrictions slowed spending, but in general the Omicron variant did not have a massive impact as retail sales held up through December. However, January is expected to be a more difficult month for the high street with footfall at UK outlets seen lower in the first week of January.

Businesses in the retail sector have warned that the spread of Omicron and the increasing costs of living could have a significant impact on sales this year.

Bank of England interest rate hikes

While a February rate hike would be the second interest rate rise in just two months, the total number of hikes to be delivered in 2022 is yet unknown and will be a crucial factor in the pound’s performance.

The Bank of England's unexpected December rate hike has led the market to believe that there will be more near-term rate hikes. As it becomes clearer how the Bank is expected to act and how many rate hikes will be delivered over the coming months, the pound will gain further support.

With the Omicron variant slowly subsiding and markets regaining optimism the British currency will also gain traction. As BBC reported on Wednesday, Covid cases in the UK are decreasing according to the daily figures released by the government, with the number of cases confirmed over the past seven days having fallen 13% compared to the previous week.

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The Pound has strengthened on Friday and is on track to reach its biggest weekly rise since October following the Bank of England’s announcement on Thursday to raise interest rates. The BoE is the first major central bank to raise interest rates since the start of the pandemic. This week, the Federal Reserve has also signalled its intention to tighten its policy in 2022, while the European Central Bank has taken small steps towards rolling back its pandemic-era stimulus on Thursday. It has started by wrapping up its pandemic bond purchases next March. But the Bank does not appear to be raising interest rates soon.

UK interest rates rise to 0.25%

The Bank of England surprised markets on Thursday by raising interest rates to 0.25%. The pound, gilt yields, and bank stocks rose in response of the positive news.

On Friday (17 December 2021), strong UK retail sales data for November along with higher inflation have increased expectations of a February rate hike too.

Retail Sales

The latest positive data on retail sales and resilient consumer confidence have confirmed that consumer demand remains strong. British retail sales rose by 1.4% in November, following strong trading on Black Friday and in the period leading up to Christmas, according to the Office for National Statistics. Retail sales are 4.7% higher than a year before when many shops were closed due to the lockdown. Spending on clothes rose by 2.9%, while other stores such as computer, toy and jewellery shops had a 2.8% growth. With people returning to actual stores, malls and the high street, online retail sales fell to its lowest since the lockdown in March 2020.

Retail sales rose in October too, with consumer spending remaining strong before the Omicron variant hit the economy. According to Heather Bovill, deputy director of the ONS, “Omicron is now casting a shadow over the economy, of course. The work-from-home guidance introduced last week under plan B measures in England has left city centres depopulated, and hospitality firms warn that trading had plunged.”

Expect more rate hikes BoE's Huw Pill says

With inflation shooting higher, the Bank of England chief economist Huw Pill said that the central bank would need to raise interest rates further. Speaking on Friday, Pill explained that the rate increase from 0.1% to 0.25% on Thursday will not be the last and there will be a lot more rate hikes, if inflation remains at its current level. Pill noted that inflation pressures possibly centred around wage pressures in a shrinking labour market will prove persistent.

The hike before Christmas

Deutsche Bank has called Thursday’s Bank of England rate rise “the hike before Christmas.” Deutsche bank’s UK economist, Sanjay Raja, stated that “prudence around inflation” has forced BoE into action. As she clarified, by acting now, the central bank has maximised its chances of meeting their target in two- or three-years’ time.

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The pound held on its gains and hit a fresh one-week high against the dollar. The figures released by the Office for National Statistics showed that retail sales increased by 0.8% in October and were 5.8% higher than February 2020 levels. The rebound in retail sales strengthens the case for an interest rate hike in December by the Bank of England.

The retail sales data is in line with the rise in GfK consumer confidence. Both reports are encouraging and demonstrate that the UK economy is on the right track.

UK retail sales

Retail sales rose more than expected as consumers indulged in an early Christmas spending on toys and clothes. Retail sales rose for the first time in six months, with a 4.2% surge in spending at department stores, clothing outlets, sports equipment stores, and second-hand shops.

The ONS explained that clothing stores reported a 6.2% rise in October and the most common items bought were toys, clothes, shoes and accessories, helping bring sales close to their pre-pandemic level. More particularly, non-food stores’ sales increased by 4.2% in October 2021, with clothing stores sales only 0.5% below February 2020 levels. Automotive fuel sales fell by 6.4% in October 2021 while food store sales fell by 0.3% in October 2021. The proportion of retail sales online fell to 27.3% in October but was still higher than those of February 2020.

The ONS also reported that there was a backlash to fast fashion, as more consumers turned towards second-hand clothing. With household budgets squeezed, more people preferred charity shops for financial reasons.

Shortage fears boosted spending in October

Halloween and early Christmas shopping has helped boost spending. Helen Dickinson, chief executive of the British Retail Consortium said that retailers were relieved by the improvement in sales. Online sales remained above pre-pandemic levels while Halloween helped to boost spending further with chocolates and children’s costumes’ sales.

However, supply chain problems remain while higher prices and energy bills will put more pressure on households.

UK consumer confidence

Consumer confidence across the UK has also risen more than expected. The UK consumer confidence index, which tracks how consumers feel about their finances and the economy, rose 3 points to minus 14 in November, according to research company GfK. While consumers face rising prices and are not as confident about their personal finances, they were willing to buy expensive items. Joe Staton, Client Strategy Director at GfK, explained that headline consumer sentiment was higher despite rising inflation and a growing cost-of-living squeeze. He expressed his concerns though, as he highlighted that 2022 would be a tough year, despite the rise in both physical and virtual retail sales that showed that consumers were ready to return to normality.

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The pound fell following disappointing retail sales and a drop in the GfK Consumer Confidence survey, but reversed losses after the release of better-than-expected Preliminary PMI data for October.

PMI

The Markit/CIPS Manufacturing PMI for October came at 57.7, higher than the expected 55.8. The Services PMI also came at 58, higher than the 54.5 forecast and September’s reading of 55.4. The Composite PMI came in at 56.8, also above the forecast of 54 and the previous month's 54. IHS Markit’s Chief Business Economist Chris Williamson said that the flash PMI data was higher than the average of 54.0 before the pandemic and showed that the GDP grew each quarter 0.7%.

Markit reported that activity increased as the private sector growth reached a three-month high, with strong business and consumer spending. Service providers were the main driver behind the recovery. Employment numbers also rose as improved customer demand and confidence about the business outlook strengthened. Pressures from higher costs and staff shortages will however persist.

Retail Sales

Earlier on Friday, the ONS reported that UK retail sales fell in September. The pound dropped following the disappointing news, as it was shown that the economic slowdown might be worse than expected. Retail sales for September were down 2.6% year-on-year, lower than the expected 1.7%.

Even as we move into the Christmas period, higher gas prices will keep operating costs high and reduce consumer spending power.

November interest rate hike

The pound will also be at risk from the Bank of England disappointing markets and not proceeding as expected with the interest rate hikes. The markets now see a November interest rate hike (from 0.1% to 0.25%), as a 56% possibility, which is down from 90% earlier this week, after Bank of England governor Andrew Bailey suggested the BoE will have to act to control inflationary pressures.

BoE chief economist Huw Pill told the Financial Times that the Bank would have a "live" decision to make at its next meeting on the 4 November. While he declined to say how he would vote at the Bank’s meeting next month, he said "it is finely balanced": "I think November is live."

The UK interest rate has been at a historic low of 0.1% since March 2020. The view that November’s meeting is “finely balanced” may have encouraged traders to reconsider the odds of action next month.

GfK Consumer Confidence survey

Consumer confidence was also down in October, at its lowest since February. Consumers are concerned with the future of the economy. The possibility of a cold winter coming while dealing with fuel and food shortages, Brexit and surging inflation, as well as interest rates affecting the cost of borrowing, not to mention Covid-19 cases rising, does not sound especially promising. The Petrol Retailers Association (PRA) has said that all-time highs seen in April 2012 of 142p per litre for petrol and 148p for diesel will be surpassed by the end of October. Average prices for petrol and diesel had reached 141.35p and 144.84p respectively on Tuesday, according to Experian Catalist UK.

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The pound’s performance in the week ahead will be determined by yesterday's news that Covid restrictions will not be relaxed further until 19th of July. On Tuesday, Wednesday and Friday, investors will focus on the releases of a series of market data, including employment data, inflation figures and UK retails sales numbers, respectively. With investors being interested to see how well the UK economy is recovering, and how the Bank of England will eventually respond by raising interest rates, any sign of strong data will be pound positive.

Covid restrictions

On Monday, markets reacted to the news that the UK government will not fully relax Covid restrictions on 21st June as planned due to the rise of Covid-19 infections over the past week. British Prime Minister Boris Johnson may also announce further government support for businesses, as junior health minister Edward Argar said on Monday.

Foreign exchange markets had already priced in a possible delay, so the news has not provided any immediate volatility. 

However, if the Indian variant of the coronavirus pushes infections and hospitalisations up and the vaccines do not prevent a rise in cases . hospitalisations and deaths, then the pound may be vulnerable to volatility down the line. Foreign Secretary Dominic Raab had said on Sunday that the government’s decision on ending Covid restrictions on 21st of June would depend on whether there was no link whatsoever between infections and hospital admissions - so the change suggests that this is the case.

Economic Data

The coming week will also see a number of important economic data releases, which if they come out strong, then this could prompt the BoE's Monetary Policy Committee to start thinking of terminating its quantitative easing programme before raising interest rates in 2022. This scenario will support the pound.

  • Employment data

On Tuesday, with the release of employment data, investors will be looking to see whether 50K jobs in the three months to April have been added to the economy. The unemployment rate is forecast to come in at 4.7%, down from 4.8% previously. If numbers are better, then the pound will find further support, while any move lower could impact on the pound in the near-term.

  • Inflation numbers

On Wednesday, May inflation numbers are expected to show an increase of 1.8% year-on-year, up from 1.5% previously.  This is almost the mid-point of the Bank’s 1%-3% target range. This will be positive for the pound.

UK retail sales

On Friday, UK retail sales figures could be up, with a reading of 36.8% growth year-on-year in May, which could boost consumer confidence.

The data predictions are generally optimistic and any digression from the numbers could hurt the pound and disappoint the markets.

Are you transferring funds abroad?

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The British Pound has remained under pressure on Friday, especially after Thursday’s losses due to disappointing news that the Brexit negotiations have hit an impasse. Today’s (24/07/2020) better than expected retail sales did not help push the pound higher against its major rivals.

Brexit and Covid-19

Despite positive macroeconomic data, the coronavirus pandemic and concerns about the state of the Brexit trade negotiations have weighed on the pound. As the Guardian reported, on Friday morning the release of “the retail figures are doing little to support UK stocks with the FTSE 100 down 1.36% and the more domestically focused FTSE 350 down 0.6%.”

Positive Retail Sales’ Numbers

The easing of lockdown in mid-June helped UK retail sales beat forecasts in June. The Office for National Statistics has reported a 13.9% month-on-month rise in UK retail sales last month, marking an 8% uptick. Even for former Bank of England policymaker Andrew Sentence, the figures highlighted that the UK was on its recovery since the Covid-19 outbreak. The retail sales’ increase was the result of consumers spending for DIY and home improvement products due to the lockdown, with shops selling hardware, furniture and appliances doing particularly well, and reaching near-pre-lockdown sale levels.

With the easing of lockdown measures, consumers preferred real physical shops rather than online shopping, as the ONS noted that the proportion of online sales retreated from its record peak in May. Online spending, however, remained at 31.8%, higher than February’s 20%. UK total retail sales are now just 0.6% lower than February before the lockdown.

ONS deputy national statistician Jonathan Athow said:

“Retail continued to recover from the sharp falls seen in April, with overall sales now almost back to pre-pandemic levels. But there are some dramatic differences in sales across the retail industry. Food sales continue above their pre-pandemic levels due to the closure of cafes, restaurants and pubs. Online sales have risen to record levels, and now count for £3 in every £10 spent. On the other hand, clothing sales remain depressed and across the high street sales in non-food stores are down by around one-third on pre-pandemic levels. The latest three months as a whole still saw the weakest quarterly growth on record.”

With the exclusion of fuel sales, due to the lockdown and limited travelling, the level of sales was 2.4% higher than in February. According to figures, Britain’s economy shrank by more than a quarter in March and April and recovered slightly in May.

Is the UK economy recovering?

Former Bank of England policymaker Andrew Sentence said that the figures highlighted the UK was on its recovery since the Covid-19 outbreak. The Bank of England’s chief economist, Andy Haldane, has also pointed to a V-shaped recovery with the economy growing by around 1% a week, something that many of his colleagues have questioned. The British Retail Consortium said that spending among large high-street chains was 3.4% higher this June than last year.

As investors await the release of more figures to confirm expectations of a sustained economic recovery, the pound will remain under stress with Brexit as well as the growing number of deaths from Covid-19. If you are buying a home overseas or want to transfer funds to family and friends living abroad, get in touch with our friendly  Universal Partners FX team. UPFX’s dedicated foreign exchange specialists can help you access the most competitive exchange rates and make your currency transfers stress-free.

Sterling was under pressure after Friday’s British retail sales figures showed that sales fell in March, despite an increase in consumer goods, particularly alcohol.

This was the biggest fall since 1996 when the Office for National Statistics (ONS) began recording the figures. As Rhian Murphy, ONS head of retail sales said, “Retail sales saw their biggest monthly fall since records began over 30 years ago with large declines in clothing and fuel, only partially offset by strong food sales. The “retail armageddon” as was described by Ayush Ansal, chief investment officer at hedge fund Crimson Black Capital, was a reflection of the Covid-19 pandemic.

The pound has been sensitive to gloomy economic figures but also coronavirus updates, as the foreign exchange market is watching to see how the country deals with the lockdown and how fast it recovers.

UK retail sales: Economists predict further fall in April

Thomas Pugh of Capital Economics noted that the record fall in UK retail sales last month demonstrates that consumption has fallen during the lockdown:

“At one end, there were clear signs the pandemic was keeping consumers away from the high street, non-food sales excluding petrol and online sales were down by 19.4% m/m, with an especially sharp 34.8% m/m fall in clothing sales. And petrol sales declined by 18.9% m/m. Department store sales did rise by 2.8% m/m, but appears to be due to purchases of food and other items online. On the other hand, food & drink sales were up 10.4% m/m (within that alcohol 31.4%!) and online sales (non-department store) rose by 5.9% m/m, as consumers were locked down at home.”

But the fall in March is only the beginning, as economists believe that April will post a bigger fall. Alan Custis, head of UK equities at Lazard Asset Management, says that “the real story will be seen in April’s figures when the lock-down will be fully felt by retailers. Here we expect to see dire numbers, but it must be balanced up by very strong online sales, which we expect will be showing growth in excess of 50% year on year. There have been clear winners and losers and we think this will only become more apparent the longer the crisis continues.”

Consumer confidence at its lowest

Further disappointing stats did nothing to support the pound. On Friday, data from the research company GfK showed that British consumer confidence was at its lowest in April.

The balance of consumers who were considering making major purchases dropped to minus 52 in April, while, the net balance of those expecting their financial situation to improve dropped to minus 14. Howard Archer, chief economic adviser at the consultancy EY Item Club said: “The near-term fundamentals for consumer spending have clearly taken a very substantial downturn as a result of coronavirus. Many people have already lost their jobs, despite the supportive government measures while others will be worried that they may still end up losing their job once the furlough scheme ends.”

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