July UK retail sales came in much better-than-expected in spite of Brexit doldrums. Retail sales excluding auto and fuel rose 5.4%y/y, beating the median forecast and previous reading of 3.9% as the sales of textile, clothing and footwear increased 5.1%m/m, compared to a contraction of 1.6%m/m in June.
The weak pound may have helped to boost consumers spending, however it also seems that the market has been overly pessimistic concerning the effects of the UK’s decision to leave the European Union. A weaker pound is therefore a good thing as it will help the UK economy weather the expected contraction in GDP. In its last report, the Bank of England held its GDP growth forecast steady at 2% for 2016 but revised its 2017 forecast sharply lower, from 2.3% to 0.8% in anticipation of a substantial slowdown in personal consumption on the longer-term. Perhaps July’s solid retail sales are a once-off and the positive effects of the weaker pound will be short-lived. We are just starting to get post-Brexit data.
Besides retail sales, the job market is holding ground despite gloomy forecast. Employment rate is above 74%, while the unemployment rate held steady at 4.9% while jobless claims fell 8.6k in July (versus +9k median forecast). Finally, headline inflation ticked up to 0.6%y/y in July from 0.5% in the previous month. Therefore, one thing is certain: the market has been overly pessimistic in the wake of the Brexit vote and clearly needs to better assess the lay of the land.
The upcoming batches of data from the UK will be key in determining the medium to long-term effect of the Brexit. After moving as low as 1.2866 in the wake of the BoE easing move, GBP/ USD reversed momentum and climbed as high as 1.3185. The pound sterling was under selling pressure on Friday as US dollar bulls returned to the market, pushing the pair down to 1.3080.