GBP: Brewing storms - Rabobank

Jane Foley, Research Analyst at Rabobank, suggests that sterling is continuing to demonstrate a heightened sensitivity to UK economic data releases as the market attempts to evaluate the impact of the June 23 EU membership referendum on the UK economy.

Key Quotes

“But while it was reassuring to see the better tone of many July data releases, the reality is that Brexit has not even started to happen. Until Article 50 is signed and the UK’s divorce from the EU is put in motion, the external trading environment for the UK economy will remain essentially unchanged, apart from the sharp depreciation in the value of sterling.

For some parts of the economy the weaker pound has had an immediate effect. Manufacturing orders are reported to be higher and anecdotal evidence suggests that this summer has seen both an influx of tourists and a wave of ‘staycationers’. Consistent with this, after a strong set of retail sales data in July, figures from Visa suggest that in August leisure and recreation remained the strongest performers in this sectors with consumers making the most of the good summer weather. However, the strength was not recorded across the board. In contrast to July, Visa report that clothing retailers had a poor month in August. In fact Visa report that household spending in August saw the slowest growth in almost 3 years at July 0.1% y/y.

The poor indications for the performance of the UK retail sector in August are not universal. Barclaycard reports strong August growth after a muted July. However, an August pullback is also noted by the BRC retail survey which suggests that sales in August had their weakest performance since September 2014, excluding Easter distortions. According to the BRC findings total retail sales rose 0.6% in August half the rate of the 12 mth average of 1.2%. Irrespective of the impact of the Brexit referendum or the weather, slow growth in consumer spending would be consistent with the continued moderate rate of real wage inflation (see graph). Today’s UK labour market report shows that real average weekly earnings (total pay) grew by 1.9% 3m y/y in the 3 month to July, which is 0.3 percentage points lower than in the previous period.

Insofar as investors are desperate to work out the impact on the economy of the June referendum, the publication of soft official UK retail sales data tomorrow can be expected to undermine GBP (median -0.4% m/m). Yesterday softer than expected UK CPI data had a dampening effect on the pound. The market’s sensitively to CPI releases remains despite the BoE’s pledge to look through cost push inflation and set policy to support the real economy. Arguably this pledge means that the value of CPI releases in determining BoE policy responses has been lessened and data such as wage and consumption data has been elevated. In any case, it is likely to take some time before the weaker tone of GBP makes a full impact in UK consumer inflation data and despite soft data yesterday it remains the case that CPI inflation could surpass the BoE’s 2% inflation target during the course of 2017.

While consumer data may provide some insight as to the here and now, investment data should give an idea of the medium-term outlook for growth and inflation. It will be a few months before the BoE releases its investment survey for the post referendum period but several other indications have not been encouraging. News that demand for UK money market funds has surged could be another indication of a reluctance to invest in the current environment. Given that the start of the Brexit talks will start to give form to the degree of uncertainty facing the UK, we anticipate that GBP remains vulnerable medium-term. Even though the EUR could be subject to political uncertainty next year given key elections, we look for EUR/GBP to move towards 0.87 by the middle of next year.”