Pound Drops to Week's Low as Retail Sales Boost Is Short-Lived

(Bloomberg) -- The pound fell to the week’s lowest level after a modest rebound spurred by a pickup in retail sales proved fleeting.

Sterling was on course for a fourth day of losses, weighed down by the fading prospects of a Bank of England interest-rate increase after inflation slowed in June. Markets are closely watching data to gauge if last year’s vote to leave the European Union is having an negative impact on the economy.

• “The data doesn’t really change the underlying trend that retail sales growth has softened this year,” said Lee Hardman, a foreign-exchange strategist at MUFG in London, limiting sterling’s moves. “It would take a run of stronger reports to ease concerns over the slowdown in consumer spending”
• GBP/USD was 0.5 percent weaker at 1.2956 as of 10:52 a.m. in London, its lowest level since July 14; it has retreated 1.3% from a 10-month high of 1.3126 reached on Tuesday
  • Support: 1.2955, July 13 high
• “The pound is struggling this morning and has dipped below $1.30, even though U.K. retail sales for June were positive,” Kathleen Brooks, EMEA Research Director at City Index, writes in a note
  • “Although the bounce in sales last month was a welcome development, it still means that for the first half of the year retail sales will be relatively flat, and may only contribute 0.1% to Q2 GDP”
  • “This does not bode well for the U.K. growth outlook, which is one reason why the pound’s reaction has been muted”
  • The “pound’s chance of a meaningful rally” is limited as the nation goes deeper into Brexit talks, Brooks adds
• The quantity of goods sold in stores and online rose 0.6%, more than economists forecast, following a 1.1% decline in May, figures from the Office for National Statistics showed Thursday. Sales excluding auto fuel jumped 0.9% compared to a 1.5% drop previously
• However, “given its volatile nature, we do not expect today’s data to prove a sustainable market driver,” analysts at Credit Agricole wrote before the data
  • “If anything, we stick to the view that incoming data is unlikely to prove constructive enough in order to drive medium-term inflation and rate expectations higher”
  • “This in turn suggests that GBP upside is likely to remain limited around the current levels”
• Sterling has struggled to hold gains as Brexit negotiations proceed. Trade Secretary Liam Fox said Thursday that Britain “can of course survive with no deal” and has had “positive response” at World Trade Organisation over terms after U.K. leaves EU
• Deutsche Bank AG is preparing for a hard Brexit and will probably book the “vast majority” of its assets in Frankfurt, Chief Executive Officer John Cryan tells employees in a videotaped message
• Yield on 10-year gilts climbs 1bp to 1.20%, after 11 bps decline in the previous three days

--With assistance from Sejul Gokal and Anchalee Worrachate

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma