UK Economy on the Rise Following strong Retail Sales and PMI Data

The UK economy is on the road to recovery following the reopening of non-essential businesses last week and the release of positive retail sales and PMI data this morning. The Office for National Statistics (ONS) has revealed that UK retail sales for March rose by 5.4% month on month, substantially higher than the 1.5% that was expected. The boost was largely down to consumer optimism, paired with the imminent easing of lockdown restrictions.

Composite purchasing managers index (PMI) data for April is also showing higher than expected. UK manufacturing PMI for April registered at 60.7, its highest level since July 1994. Meanwhile, UK services PMI reached an 80-month high of 60.1.

Chris Williamson, chief business economist at IHS Markit, said, “in more than 23 years of PMI history, we have only seen one spell of faster growth than this, recorded between August and November 2013”, which suggests the UK is on track for a robust economic rebound.

The impressive figures, however, have done little to provide further support for Sterling, with the British pound (GBP) failing to extend gains against its currency rivals. At the time of writing, the British pound to euro (GBP/EUR) exchange rate is 0.2% lower EUR 1.1488, whilst the British pound to US dollar exchange rate is 0.08% higher at USD 1.3851.

Whilst the lack of progress in the British pound (GBP) may seem alarming, Sophie Griffiths, market analyst, UK & EMEA at OANDA, states that positive PMI data is more prominent within currency markets where both the British pound (GBP) and the euro (EUR) are taking advantage of a frailer US dollar (USD).

The UK economy looks to be in a prime position to see a meaningful recovery during Q2 as forecast by the Bank of England (BoE) despite recent losses in the British pound (GBP). UK consumer sentiment rose to its most substantial levels since the coronavirus pandemic first began as the GfK Consumer Confidence Index revealed an increase to -15 in April from -16 in March. The reading is the highest since March 2020, when the UK entered its first national lockdown.

In the near term, however, the British pound (GBP) looks to remain susceptible to the vulnerability of global risk appetite.

Euro supported by German manufacturing data

The UK is not the only country to witness strength in the manufacturing sector today, as manufacturing PMI for Germany reveals a steady reading of 66.4. Being the largest economy in the Eurozone, euro (EUR) investors were concerned as Germany began to experience a surge in coronavirus cases this year, with the country currently under lockdown restrictions. Germany’s positive manufacturing PMI suggests the country has been able to shake off the pressures of recent COVID-19 infections, which has boosted the single currency.

Germany could further support the euro (EUR) on Monday following the release of IFO business sentiment indexes. Signs that the German economy is continuing to strengthen despite the current lockdown restrictions could encourage market risk appetite.

The single currency was left unscathed by yesterday’s European Central Bank (ECB) monetary policy meeting, which saw little policy change, though euro (EUR) investors continue to look for signs as to when monetary stimulus will wind down.

ECB President Christine Lagarde stated that the conservation of favourable financing conditions during the coronavirus pandemic remained a priority during the meeting. The ECB aims to diminish uncertainty and bolster consumer confidence by supporting economic activity and safeguard medium-term price stability.

During the ECB’s monetary policy meeting in March, it was confirmed that bond purchases would be extended until March 2022, within the budget of EUR 1.85 trillion. They also expressed concern for increased borrowing costs across Eurozone governments before the economy has fully recovered from the effects of the coronavirus pandemic.

Following these concerns, data from Deutsche Bank revealed that the ECB purchased EUR 74 billion worth of bonds in March, an increase from EUR 53 billion in February and EUR 60 billion in January. The ECB confirmed yesterday that bonds would continue to be purchased under the Pandemic Emergency Purchase Programme (PEPP) at a higher pace during Q2 to support Eurozone economies rocked by the coronavirus pandemic.

Much of Europe is currently experiencing a third wave of COVID-19 infections, with many countries having to reimpose restrictions in a bid to curb the spread of infection. Euro (EUR) investors will look towards June’s ECB meeting where it’s likely that the ECB will discuss the easing of stimulus due to a more significant percentage of the EU being vaccinated and the easing of travel restrictions.

US economy on a solid footing

Whilst the British pound (GBP) was able to mildly capitalise on the release of the UK’s progressive PMI data against the US dollar (USD), the US economy is continuing to bounce back from the financial devastation of COVID-19.

Having become the world’s most affected country by COVID-19, the US is gradually showing signs of strength, with US unemployment claims falling once again this month. The latest figures show that US unemployment claims have fallen to their lowest levels since the coronavirus pandemic began, dropping to 547,000.

Economists forecast that the US economy will grow at its fastest annual rate this year, with the rising outlook primarily down to the impacts of President Biden’s USD 1.9 trillion stimulus package. The US President has also proposed a USD 2 trillion infrastructure package to fund US transportation, affordable housing and manufacturing.

According to the international monetary fund (IMF), the US economy was forecast to see 6.4% growth in 2021. However, many economists predict that the US economy could grow by as much as 7% by the end of 2021, whilst others believe the progress could be hindered by a potential rise in coronavirus cases over the coming months.

Sal Guatieri, senior economist at BMO Capital Markets, stated that economists raised their forecasts regarding US economic growth due to additional stimulus measures and the rapid COVID-19 vaccination program. However, it’s also thought that another wave of coronavirus cases could place these predictions at risk.

Next week will see the Federal Reserve’s April policy meeting take place, which is thought to maintain a dovish tone, which could weigh on the Greenback’s appeal.

AUD supported by risk-on mood

Whilst the UK’s PMI data helped pound Sterling (GBP) limit further losses against the Australian dollar (AUD), the currency pairing continues to face pressure as the ‘Aussie’ dollar benefits from the overall risk-on mood.

The British pound to Australian dollar (GBP/AUD) exchange rate is currently trading 0.3% lower at AUD 1.7899.

Australia has also seen the release of solid flash PMI today due to substantial private sector growth. The easing of coronavirus restrictions in Australia has enhanced consumer confidence and helped to support demand. The period has been further bolstered by a sharp output increase which has expanded by the sharpest rate since 2016.

The progress of the Australian dollar (AUD) is likely to be further impacted by the release of Australia’s Q1 inflation levels during the start of next week.