Currency Note

Sterling falls sharply on retail sales data

By Alex Bennett September 16th, 2022

Sterling weakened decisively during the course of yesterday against the US dollar and euro, by between 0.5 and 1%.

This was on the only day of the week when there were no major data releases, but the markets began to doubt that the Bank of England will be as assertive on interest rates next week as they had predicted.

That has been exacerbated this morning with very poor retail sales data for the UK in August, dropping 1.6% compared to July. In the US, for comparison, retail sales grew by 0.4%

With the economy suffering but inflation remaining at below 10%, and the promise of the government’s energy subsidy keeping it there, there is increasing doubt that next week’s interest rate rise will be 75 basis points. The European Central Bank (ECB) on the other hand, did raise rates by 75 basis points last week. However, the World Bank warned yesterday that such moves are risking a global recession.

Next week on Thursday there will be the delayed Bank of England interest rate decision. Then on Friday is the new chancellor’s much heralded “fiscal event”, a kind of mini-Budget where Mr Kwarteng is expected to announce tax cuts.

He is also expected to make the politically unpopular decision to remove the cap on bankers’ bonuses, which was imposed by the EU following the financial crisis in 2008, as part of what is being dubbed “Big Bang 2.0”.

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GBP: High street sales drag sterling down

Sterling has dropped to a fresh multi-decade low against the US dollar this morning, as woeful retail sales data shocked the markets. Against the euro, sterling has dropped too, and is currently at a new 18-month low.

Yesterday’s inflation attitudes survey from the Bank of England (an interesting measure of its own performance) showed that the public is unimpressed at the Bank’s efforts to control inflation, with satisfaction to its lowest level since records began 23 years ago.

Most financial institutions, as well as shops and business, will be closed for the Queen’s funeral on Monday.

GBP/USD past year

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EUR: Euro pulls ahead of GBP as gas fears ease

The euro has strengthened by as much as 1% against sterling over the past 24 hours, while remaining broadly static against the US dollar.

There hasn’t been much data for the markets to get excited about this week, but the rise has been on the back of last week’s interest rate rise, plus the hope that Europe’s energy crisis might be less bad than first thought. Wholesale gas prices have stabilised and there are hopes that prices could fall significantly.

Speeches by various ECB interest rate setters have convinced the markets that they are serious about tackling inflation, while the Bank of England is being seen to equivocate.

USD: Dollar beats pound but level on euro

The dollar’s fortunes were patchy yesterday, strengthening markedly against the pound and various other dollars, but making no gains on the euro.

This morning USD/GBP has reached a new multidecade high. The countries’ relative performances on retail sales tells the tale: in the US they rose by 0.3% in August – better than expected – while in the UK they fell by 1.6%, far worse than expectations.

Today’s data includes Michigan Consumer Sentiment for September, which is predicted to grow, plus the Michigan 5 year inflation expectations, both at 3pm UK time.

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