GBP USD Exchange Rate Tripped Up by Soft UK Retail Data

The pound touched its highest level against the dollar since early July on Tuesday, as investors weighed up the chances of a 50 basis points (bps) interest rate hike by the Bank of England next month amid a worsening economic outlook. Risk sentiment tailwinds from Monday also provided a lift.

The UK currency’s move away from a March 2020 low of below 1.18 revisited this month was short-lived. However, political uncertainty, soft data, and a shift in risk appetite caused it to tumble to 1.196.

Morale among British retailers is low as the cost-of-living crisis strangles demand. Spending is slightly lower this month, figures from the Confederation of British Industry (CBI) showed on Tuesday.

The CBI’s retail sales balance for July ticked up to -4 from -5 the previous month. However, expectations for August fell to -14 – the lowest reading since March 2021, when COVID-19 lockdown restrictions were still in force.

CBI economist Martin Sartorius said: “Retail activity continues to take a hit as consumers struggle to cope with the effects of the cost of living crisis,”

Interest rate announcement in focus for the dollar

Deepening uncertainty about the pace of Federal Reserve policy tightening following this week’s expected interest rate rise offset dollar gains. 

The Fed’s two-day July meeting kicks off on Tuesday, with central bank policymakers limbering up to deliver a 75 bps rate rise. But softening economic growth is unnerving investors who will watch the Fed press conference, scouring the monetary policy statement for signals of a slower rate hike pace ahead. 

Home prices in the US were 19.7% higher in May compared with 12 months ago, according to the S&P CoreLogic Case-Shiller national home price index. These figures marked the second month of slower increases as the housing market cools amid mounting concern over inflation. In April, the annual gain was 20.6%. 

“Despite this deceleration, growth rates are still extremely robust,” Craig Lazzara, managing director at S&P DJI, said after the print.

With the Fed set to hike interest rates again on Wednesday, markets are alert for signs of recession. Recent housing data suggests the sector could herald a cooling economy. 

Looking ahead

A busy day in the US, Wednesday sees two influential data sets – durable goods orders and nondefense capital goods orders excluding aircraft – released ahead of the Fed’s interest rate announcement. 

It’s another quiet day in the UK docket, with the British Retail Consortium (BRC) shop price index overnight on Tuesday the only release. 

The other big news for the euro this week was the expectation that Russian gas would come back online after Russia’s maintenance.

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