UK retail sales bounce back but pound still suffering

The pound is struggling this morning and has dipped below $1.30, even though UK retail sales for June were positive as the hot weather boosted non-food sales including household goods and clothing. Food sales continue to weaken, possibly on the back of higher food prices, but overall, the pressure was lifted from the UK’s beleaguered retailers for one month at least.

Retail sales won’t do much for growth

Now for the less positive news, 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 UK growth outlook, which is one reason why the pound’s reaction has been muted. Thus, unless we see retail sales rise consistently in the coming months, which could be a big ask as we get deeper into Brexit negotiations that may trigger consumer uncertainty, then second half growth could be hindered, limiting the pound’s chance of a meaningful rally.

The market view

From a technical perspective, we would need to see the pound close below $1.30 before the outlook for sterling becomes darker, overall, we think the direction of the pound could be driven by the ECB later today. If the ECB can trigger a significant move in the euro then we could see an impact on the other major currencies including the USD, GBP and JPY. A 120-day correlation analysis shows that the euro is most negatively correlated with the Swiss franc, the Dollar index and the Swedish Koruna, respectively. The Swiss franc tends to move 0.85% in the opposing direction of the euro if the single currency has a significant move. Considering we expect the ECB to be dovish today, if you think that this could weigh on EUR/USD then the Swiss franc could be the biggest beneficiary.

The FTSE 350 retailers’ index is higher today on the back of the data, and is up 0.7% as Next benefits from the better than expected clothing sales. Other major retailers such as M&S and Debenhams, have fared less well as these companies continue to face internal struggles. The FTSE 350 retailers’ index remains close to its lowest level for over a year, which is one of the lowest levels since 2012. Even after today’s uptick, the UK consumer remains constrained by weak wage growth  and continuing economic uncertainty over the Brexit negotiations, this could limit the earnings power of the retailers for some time, thus we remain fairly pessimistic on the medium-term outlook for UK retailers.