Pound Sterling tumbles following weak UK retail sales data

• Pound Sterling (GBP) tumbles following disappointing UK retail sales data
• US Federal Reserve interest rate decision hint boosts USD/EUR and USD/JPY
• Safe-haven currencies such as the Japanese yen (JPY), US dollar (USD) and euro (EUR) head higher in foreign exchange markets
• Hopes about international travel reopening fail to support the British pound (GBP)

After a relatively strong week, the British pound (GBP) has erased gains stemming from hopes for international travel and inflation data and is heading lower across the board.

Pound Sterling (GBP) strengthened following news that fully vaccinated Brits may be able to travel to “amber” listed destinations quarantine-free sooner than expected and confirmation that UK inflation had beat forecasts.

However, the UK currency has plummeted ahead of the weekend in the wake of disappointing retail sales data.

Pound Sterling falls after UK retail sales data misses expectations

According to the ONS, UK retail sales plunged by 1.4% in May, far lower than consensus estimates for a 1.6% rise.

The ONS noted that the slump in retail sales might have been triggered by increased spending in bars, pubs and restaurants, with shoppers choosing to take advantage of the hospitality sector instead of purchasing food from supermarkets.

The ONS noted that there were “contrasting pictures within the sector”  as sales in non-food stores continued to rise month-on-month in May 2021.

However, sales for clothing and department stores fell following solid growth in April, which appears to have rattled financial markets.

Although the year-on-year rise in UK retail sales was impressive at 24.6%, economists had expected growth of 29%.

The latest figures have given rise to concerns that the UK’s consumer-led recovery could fall short of economist expectations, which has led to questions over the value of pound Sterling (GBP).

The British pound to euro (GBP/EUR) exchange rate is trading 0.4% lower at EUR 1.1642 after breaching the EUR 1.17 level earlier this week.

Despite impressive Eurozone inflation data, GBP/EUR has managed to avoid sharp losses thanks to the latest US Federal Reserve (Fed) interest rate decision, which has hampered EUR strength.

After rallying to a high of USD 1.2147 this week, the euro to US dollar (EUR/USD) currency pair has plummeted to USD 1.187 ahead of the weekend – a loss of nearly 2% on the week.

The British pound to US dollar (GBP/USD) exchange rate also tumbled following the Fed’s announcement.

At the time of writing, GBP/USD is trading an eye-watering 0.8% lower at USD 1.3819 – far lower than this month’s high of USD 1.4247.

The broad-based USD rally has placed GBP/USD on course for its most significant weekly loss since September last year, and ongoing signs of UK consumer confidence dwindling could harm the currency pair further in the coming week.

Pantheon Macroeconomics Chief UK Economist Samuel Tombs said: “We continue to think that the recovery in households’ spending will lose momentum as it approaches its pre-Covid level later this year.”

Expectations for a vaccine-induced consumer spending boom in Britain have made pound Sterling (GBP) one of the best performing major currencies of 2021. The Bank of England (BoE) anticipates up to 10% of the savings glut to be unleashed post-lockdown.

However, signs that consumers are becoming more cautious could undermine this expectation and dent pound Sterling (GBP) gains.

Samuel Tombs warns that the end of the furlough scheme could also negatively impact “households’ real disposable income”, especially if inflation outstrips wage growth.

The chief economist of Pantheon Macroeconomics also said that the tapering of the stamp duty holiday would result in reduced demand “for big-ticket household goods” in Q4, which will weigh on GBP.

However, foreign exchange (FX) strategists at Nomura have told clients to sell EUR/GBP in anticipation of GBP outperformance.

Will GBP reverse its fortunes as the UK economy reopens?

Financial services company Nomura Holdings expects GBP to outperform in the long term, noting that the British pound to euro (GBP/EUR) exchange rate is trading near its highest levels since early April 2021.

Although UK retail sales data and the Fed interest rate decision has exerted some downside pressure on the currency pair, the move triggered a stronger reaction in EUR/USD, which fell well below the psychologically significant USD 1.20 area following the Fed announcement.

Fed Chair Jerome Powell also gave the US dollar to Japanese yen (USD/JPY) exchange the boost it needed on Thursday, albeit the currency pair is trading on a softer note ahead of the weekend.

At the time of writing, the US dollar to Japanese yen (USD/JPY) exchange rate is trading flat at JPY 110.2845.

The US dollar (USD) advanced against its major trading rivals on Thursday after the Fed hinted at scaling back its quantitative easing programme earlier than anticipated due to the improving outlook of the US economy.

FX market participants had not expected the Fed to perform an interest rate hike until 2024, so they celebrated the more hawkish outlook from the Federal Open Market Committee (FOMC) by purchasing the greenback and selling stocks.

Although the news triggered a shift in risk appetite, the euro (EUR) was left exposed as the European Central Bank (ECB) now lags the Fed and the BoE in the race to normalise policy settings – hence the relatively weak performance in EUR/GBP.

That said, Nomura does not expect the BoE to be a promising source of near-term support for GBP, given that the upcoming policy meeting is likely to reveal any significant policy changes.

They suspect that the following policy meeting in August will act as a catalyst for any shifts in GBP exchange rates, with a more dovish outlook expected to drag the currency lower in FX markets.

Although COVID-19 cases are rising in Britain, Nomura FX strategist Jordan Rochester believes that the UK economy’s robust recovery will continue to support the British pound (GBP) this year.

Nomura expects EUR/GBP to decline to GBP 0.83 by year-end, which would see GBP/EUR rise above the EUR 1.20 level.

However, much of this theory rests on the coronavirus situation in the country improving. As it stands, the Delta variant is spreading rapidly, which negatively affects consumer and business confidence.

Concerns over the growing spread of the B.1.617.2 variant have also been reflected in the British pound to Japanese yen (GBP/JPY) exchange rate, which appears to have occupied a bearish trend this week after being bullish for five months.

The British pound (GBP) has plummeted by 0.9% against the Japanese yen (JPY) to JPY 152.3075 and could continue to head lower ahead of the upcoming Bank of Japan (BoJ) interest rate decision.

Although the BoJ is widely expected to keep interest rates at -0.1%, economists predict that inflationary pressures could see policymakers hint towards an earlier than expected interest rate hike, which would be bullish for JPY.

However, the central bank may decide to extend its coronavirus pandemic relief programme and hold or lower the interest rate due to the fragile state of the economy, which would prove pound-positive.

GBP struggling against risk-on currencies despite the risk-off mood

The British pound is trading flat against both the Australian and Canadian dollars ahead of the weekend despite reduced risk appetite.

At the time of writing, the British pound to Australian dollar (GBP/AUD) currency pair is trading at AUD 1.8434, while the British pound to Canadian dollar (GBP/CAD) exchange rate fluctuates around CAD 1.72.

GBP/CAD rose in the wake of the US Federal Reserve’s hawkish statement but slipped as concerns over UK economic recovery were fuelled by weak retail sales data and signs that COVID-19 cases in the country are growing exponentially.

Although USD strength is undermining CAD on Friday, Thursday’s release of Canadian Consumer Price Index (CPI) data could lift CAD/GBP higher when the noise around the greenback settles.

The same could be said for the “Aussie” dollar, which has benefited from the latest Australian employment data, which beat forecasts and rose from -30.6K in April to 115.2K in May.

Unemployment levels in Australia have also improved, with the seasonally adjusted rate down from 5.3% in April to 5.1% in May – 0.1% lower than pre-pandemic levels.

Although rising housing prices and tensions with China leave the currency exposed to some vulnerability, the outlook for AUD is becoming increasingly optimistic.