UK Retail Sales Drive Pound Higher On Rate Expectations

The British Pound (GBP) is rallying back toward its highest levels in nearly eight months versus the Dollar (USD), as the September retail sales report showed evidence of strengthening consumer activity in Europe’s third largest economy.  This is an important development, mostly because markets are in flux with respect to UK interest rate expectations.  Last week, we saw the release of the September meeting minutes from the Bank of England, which showed that members voted unanimously to suspend additional stimulus injections on signs of continued recovery.  

The British Pound (GBP) is rallying back toward its highest levels in nearly eight months versus the Dollar (USD), as the September retail sales report showed evidence of strengthening consumer activity in Europe’s third largest economy.  This is an important development, mostly because markets are in flux with respect to UK interest rate expectations.  Last week, we saw the release of the September meeting minutes from the Bank of England, which showed that members voted unanimously to suspend additional stimulus injections on signs of continued recovery.  

This is an extremely bullish scenario for the GBP and this week’s retail sales data give markets additional confirmation that the Bank of England has reached the completion of its easing cycle.  The GBP is now showing gains against all 16 major currency counterparts, showing a strong continuation of the momentum seen since the first quarter.  In the last six months, the GBP has gained nearly 6 percent against the USD, so the possibility of further gains will depend on central bank commentaries suggesting a willingness to begin raising interest rates. 

“Stronger retail sales are an important part of any economic recovery,” according to Ann Gorenkova at NordFX Company.  “This week’s data strengthen the interest rate outlook in the UK, and this should support the GBP near-term.” 

The UK retail sales gauge increased to 34 for the month of September (the highest level since the middle of 2012), up from 27 seen in August.  This improvement was particularly surprising because the consensus analyst estimates called for a decline to 23.   The GBP/USD has now firmly regained the 1.60 level, which is highly important from a psychological perspective.

Sustainable Momentum

For forex traders with longer term time horizons, it will be important to remain aware of the trend momentum in the GBP given that we are trading at elevated levels relative to near-term averages.  This leaves the currency vulnerable to downside corrections, especially if we see a re-introduction of “tapering” discussions from the US Federal Reserve.  At this stage, it is essentially a race to see which central bank commits to ending its stimulus programs first.  But the latest rallies in the GBP indicate traders are reluctant to believe we will see massive reductions in Fed stimulus before the end of this year. 

The Bank of England has made public statements suggesting we will see no interest rate increases until unemployment levels drop below 7 percent.  This is still a ways off, given that the jobless rate currently stands at 7.7 percent.  In order to achieve this goal, the UK economy would need to add another 750,000 jobs. 

If we see progress made in these areas, traders should expect to see additional rallies in the GBP as this will help to solidify the projection outlooks espoused to far by the Bank of England.  In any case, the GBP continues to show strength as one of the currency market’s outperformers, which well serves traders implementing breakout strategies.

By Richard Cox

Richard Cox is a university teacher in international trade and finance. Lessons in macroeconomics and price behavior in equity markets. He writes for MarketBulls.net, BinaryOptionShark.com, TheStreet,Seeking Alpha, and the Motley Fool.Investing strategies in these articles are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally suggestive of time horizons of one to six months.