Sterling saw a decline on Friday in response to the latest Retail Sales data for September released by the UK Office for National Statistics. These figures revealed a 0.9% drop in Monthly Retail Sales, a crucial gauge of consumer spending, significantly worse than the expected 0.1% decrease. In contrast, August witnessed a 0.4% increase in Retail Sales. On an annual basis, sales experienced a 1.0% contraction, a departure from economists’ predictions of a flat performance.
The explanation for this decline lies in UK households’ postponement of demand for essential goods, influenced by higher borrowing costs and persistent inflation, which have eroded their purchasing power.
These developments are poised to significantly lower consumer inflation expectations and contribute to an overall cooling of the economy, giving the Bank of England (BoE) room to extend the interest rate pause until the November monetary policy meeting.
Following the Retail Sales release, BoE Governor Andrew Bailey, in an interview with the Belfast Telegraph, expressed confidence in the upcoming decrease in market inflation next month. Next week’s Employment data release will provide further insights into the BoE’s policy direction for November.
The release of Retail Sales led to Sterling touching its lowest point against the Euro in the last five months, with a bottom at 1.1450. Sterling recovered ever so slightly since and is presently trading at 1.1470.
The Pound has also encountered challenges against the US Dollar, falling as low as 1.2090 before staging a swift rebound to 1.2160. Notably, GBP|USD now stands approximately 7% below its peak in July.
As we look ahead to the coming week, the release of UK employment data postponed from the previous week is expected tomorrow, along with UK PMI Figures. If these figures surpass expectations, we may see the Pound find some support. Nonetheless, the possibility of a rate hike in November has somewhat diminished, limiting expectations for a substantial surge in Sterling’s strength.
Tomorrow holds a pivotal role for GBP|EUR, as market sentiments lean toward the side with better-than-expected PMI figures. Expectations for the Eurozone are around 47.4 for composite figures and 43.7 for manufacturing. In contrast, the UK anticipates a services PMI of 49.5 and a manufacturing PMI of 44.6.
Eurozone’s economic sentiment has remained persistently negative since July, leaving room for a potential Euro rally if the PMI exceeds expectations. Given the Euro’s reputation as a safer investment compared to Sterling, jittery investors have been favoring EUR over GBP.
The week’s highlight emerges on Thursday with the European Central Bank (ECB) meeting, likely resulting in a pause, albeit with the possibility of keeping the door open for a December rate hike. Additionally, tomorrow brings the ECB bank lending survey for September. Last month’s survey revealed a 0.4% MoM contraction in bank lending, indicating the effective transmission of ECB monetary policy and impacting the Euro.
ECB President Lagarde is scheduled to speak tomorrow. Optimistic economic commentary could suggest a ‘soft landing’ scenario, where inflation control minimally affects growth, potentially postponing the anticipated 2024 rate cut.
While the world’s attention remained firmly fixed on the evolving Gaza-Israel geopolitical developments, traders in the GBP/USD market exhibited limited response to the partial release of UK employment data.
In the upcoming week, the Dollar’s agenda is chiefly dominated by the release of the quarterly GDP figures and the unveiling of inflation data in the form of the PCE index. However, it’s essential to keep a close eye on global investor sentiment and the trajectory of U.S. long-term bond yields, as these factors will continue to wield significant influence.
The quarterly GDP data is scheduled for release at 13:30 BST on Thursday, creating a notable overlap with the ECB’s event. This convergence could add an intriguing layer of complexity to trading activities during this time. An upbeat performance in GDP and other U.S. macroeconomic indicators for the week would likely lend further support to the “higher for longer” narrative, whereas any disappointment in the data could potentially exert downward pressure on the U.S. dollar and yields.
Additionally, among the U.S. events warranting attention, the release of durable goods orders will coincide with the GDP figures. Market expectations anticipate a 0.6% increase in durable goods orders, making it another data point to watch closely.
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