Currency Note

Soft retail sales and political jitters direct sterling

By Alex Bennett June 24th, 2022

The pound is slightly stronger against the euro and is beginning to gain some strength against the dollar this morning following the release of UK retail sales data.

Retail sales fell in May, with food stores being the main contributor, but this decline was softer than expected.

This morning also saw the Conservatives lose two by-elections in Wakefield and Tiverton and Honiton – a major blow for the party. The Liberal Democrats overturned a 24,000 Tory majority with a 30% swing to take Tiverton and Honiton in Devon, while Labour won Wakefield in West Yorkshire.

In the eurozone, disappointing PMI data has weighed on the euro. The single currency will be looking to today’s German Ifo business climate figures for support.

In the US, Federal Reserve Chair Jerome Powell rounded up his two-day testimony yesterday. He reassured Americans that the Fed is “strongly committed to bringing inflation back down” and it is “moving expeditiously to do so.”

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GBP: Retail sales softer than expected

The pound is slightly stronger against the euro and steady against the dollar this morning, however, soft retail sales data and political jitters have restricted further gains.

While retail sales did fall in May, it was by less than expected at -0.5% compared to market predictions of -0.7%. According to the ONS, the main contributor to the fall in sales volumes was food stores, which saw a 1.6% decline.

In the political world, the Conservatives have come under further pressure, losing two by-elections in Devon and West Yorkshire to the Liberal Democrats and Labour. Conservative co-chair Oliver Dowden has resigned as a result.

Yesterday also saw UK business optimism fall to a 2-year low with June manufacturing PMI figures falling to 53.4, down from 54.6 in May. Despite this, services PMI came in better than expected, unchanged at 53.4.

Notably, UK PMI outshone eurozone PMI, which showed a similar trend to the UK figures in May, suggesting that the eurozone’s slowdown is about a month behind that of the UK.

GBP/USD chart over past year

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EUR: Eurozone PMIs disappoint

The euro has weakened against the pound and the dollar, primarily due to greenback strength and disappointing eurozone data.

Poor PMI data for France, Germany and the eurozone as a whole caused the single currency to suffer yesterday. The latest German Ifo business climate figures, which measure the health of the economy, will be released this morning and could give the euro fresh support.

Later today, several European Central Bank officials will speak and there will be a European Council meeting this evening.

USD: Powell: Fed “strongly committed” to tackling inflation

The dollar remains stronger this morning after the second day of Federal Reserve Chair, Jerome Powell’s, testimony in front of the Senate.

After suggesting a recession was “certainly a possibility” on Wednesday, he added that the Fed understands “the hardship high inflation is causing” and that it is “strongly committed to bringing inflation back down.” Powell also said that the US economic conditions were generally favourable with a strong labour market and high demand.

This comes despite lower-than-expected PMI figures. However, the number of Americans filing for unemployment benefits was less-than-expected. Later today, data for new home sales will be released. The figure is predicted to have fallen in May.

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