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No support for weak pound from retail data: Is GBP on a long-term decline?

11:32, 19 August 2022

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Market trader stares down a difficult sales morning - Photo: Getty

How long will British spending resilience last? Today’s Office of National Statistics (ONS) retail July data shows confidence is being kept alive by promotions but increasingly looks closer to clearance or discount grade.

Despite July sales managing a 0.3% bump after a 0.2% fall in June, sales volumes were 1.2% lower compared with the previous quarter.

The pound in mid-afternoon trade in London was down 0.8% against a resurgent dollar (GBP/USD) at $1.1841, creeping back down towards July's two-year low. Sterling was also 0.5% lower against the euro (EUR/GBP) at £0.8492.

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Sterling slumps again against USD – how long will a sell-off last?

Promos keeping merch up

“This continues the downward trend since summer 2021,” the ONS said.

Bloomberg retail analyst Charles Allen says July sales were bumped higher by Amazon Prime Day switching from June to July. “Clothing sales stayed strong as consumers rebuilt their wardrobes,” he told Capital. 

But this was the only other clear merch positive – all other household categories were down.

Shelf life slashed

Consumer self-belief is taking a battering from rising interest rates and rents, food prices and energy bills, plus higher petrol and diesel costs. 

Very little in the UK supply chain is spared the current inflation destruction.

The high street cost pressures are reflected in a 7.8% sales value rise over 12 months says the ONS, yet overall volumes are 3.4% down on a year ago.

No rate let off

ING analyst Chris Turner says the new ONS numbers look unlikely to dissuade a Bank of England 50bp rate hike come 15 September. 

“Actually, the market now prices a 56bp hike on that date. It is fair to say sterling remains fragile. However, it looks more vulnerable versus the dollar, where GBP/USD can trade down to the 1.1935/50 area.”

The Bank of England’s job – to get inflation back down to near 2% without undermining business and employment prospects – is close to Titanic. 

It’s further complicated by terrifying stagflation risk, namely that of an apathetic economy lashed to rocketing costs and prices. 

EUR/USD

0.99 Price
-0.720% 1D Chg, %
Long position overnight fee -0.0085%
Short position overnight fee 0.0024%
Overnight fee time 21:00 (UTC)
Spread 0.00006

USD/JPY

144.44 Price
+0.180% 1D Chg, %
Long position overnight fee 0.0037%
Short position overnight fee -0.0108%
Overnight fee time 21:00 (UTC)
Spread 0.008

AUD/USD

0.64 Price
-0.660% 1D Chg, %
Long position overnight fee -0.0029%
Short position overnight fee -0.0014%
Overnight fee time 21:00 (UTC)
Spread 0.00006

GBP/USD

1.13 Price
-1.020% 1D Chg, %
Long position overnight fee -0.0036%
Short position overnight fee 0.0000%
Overnight fee time 21:00 (UTC)
Spread 0.00013

“That’s reflected in weakness in the pound, which is actually good news for a globally-orientated FTSE 100 as it flatters the relative value of overseas earnings,” AJ Bell’s Danni Hewson said. 

Winter mood swings

A FTSE 100 earnings boost won’t lift the mood of those budgeting for huge winter energy bills though. Ruth Gregory, senior UK economist at Capital Economics says as inflation is set to surge further, “we think the worst of the spending crunch still lies ahead”. 

“Indeed, the decline in the own finances balance of the GfK consumer confidence survey implies sales still have further to fall.”

The GfK survey tightly tracks UK consumer confidence, asking close questions about household income and spending levels. 

Lowest score since 1974

“The Overall Index Score dropped three points in August to -44, the lowest since records began in 1974,” client strategy director Joe Staton at GfK said this morning.

“All measures fell, reflecting acute concerns as the cost-of-living soars. A sense of exasperation about the UK’s economy is the biggest driver of these findings.

“Just making ends meet has become a nightmare and the crisis of confidence will only worsen with the darkening days of autumn and the colder months of winter.”

Cautionary deformity

Currency strategist Justin McQueen at DailyFX says sterling, continuing to weaken across the board, looks more and more like a stagflation poster child.

“This has been mostly played out against the USD as Fed Officials push back against the Fed pivot narrative, prompting cable to make a firm break through 1.20. 

“That said, what is perhaps a surprise is the fact that while GBP sentiment is through the floor, net-long positioning among leveraged funds is stretched, leaving GBP vulnerable to liquidation risks. Path of least resistance remains lower GBP.”

Further reading

What You Need to Know

The week ahead update on major market events in your inbox every week. Subscribe
The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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