This morning we had ANOTHER solid UK data release. Retail sales in January jumped by 0.9% on the month, higher than expectations for a 0.7% improvement. The Core Retail Sales spike was even more impressive, rising 1.6% on the month.
This continues to the recent trend of data pointing to a substantial improvement in the UK economy in 2020, as political uncertainty eased in wake of UK PM Johnson’s emphatic general election victory. Jobs data, inflation data, PMI data, house price data and now retail sales data – all SOLID.
Moreover, since the resignation of former Chancellor of the Exchequer Javid last week, the probability of an increase in government spending (which would boost GBP) has increased; new Chancellor Sunak is expected to go along with PN Johnson’s ambitious spending plans.
So with all those positive factors supporting GBP, why has GBPUSD been getting slammed in the past few days?
Firstly, the USD is on a massive bull-run. One reason why USD has been buoyed is an increasing divergence in the performance of the US economy vs some of its major international competitors (namely the Eurozone and Japan). Another big factor has been USD’s semi-safe haven properties based on the fact that the US economy is seen as less exposed to a coronavirus-linked global economic slowdown and USD’s favourable yield (by developed market standards anyway).
Inevitably, that has put pressure on GBPUSD, which has fallen from the mid-1.30s at the start of the week to the mid-1.28s right now.
However, doing GBP absolutely no favours at the moment is the incoming first round of UK/EU negotiations on the future relationship. As we have been banging on about for weeks now, UK/EU relations at the moment are SOUR!
The UK wants a free trade agreement akin to what Canada has with the EU. It also wants the EU out of its fishing waters. The EU wants the UK to follow EU rules and regulations, which they think is a fair price to be paid if the UK wants access to the EU market. Moreover, they want continued access to UK fisheries. Both sides have thus far shown no signs of compromise on these issues, which look set to remain key sticking points in the talks.
The longer we go without a deal being reached and the closer we get to the end of the year, when the UK is scheduled to leave the EU single market with or without a deal, the more GBP will be pressured, and likely the more pressure the UK economy will be put under due to uncertainty. Afterall, it is widely agreed that a no deal end to the transition period would be a disaster for the UK economy.
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