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FTSE Falters Whilst GBP Remains Under Pressure

Published 15/06/2017, 11:23
Updated 18/08/2020, 10:10

The FTSE 100 is seeing some selling this morning since the London open, with the benchmark off by more than 50 points and trading down to levels not seen since mid-May. The pound is also lower, with a larger than expected decline in UK retail sales doing little to offer support to sterling.

Retail sales contract in May

The third successive day of major UK data points has seen the retail sales figures for the past month come in on the soft side with a 1.2% decline month-on-month. The overall picture of the UK economy is fairly mixed with recent data not providing clear signals for the pound. With the rise in price levels outstripping the growth in wages workers are feeling the pinch, but from a GBP perspective this is mildly positive. Higher inflation will impart greater pressure on the Bank of England (BoE) to pursue a more restrictive monetary policy but weaker retail sales could offset this and raise concerns surrounding the strength of the economy. Four of the six retail sales figures this year have been below consensus forecasts and this reveals a drop in consumer spending which may provide a harbinger of things to come.

More dissent at the BoE?

Whilst we may still be some way from an interest rate hike, there may be more support for lone dissenter Forbes in today’s meeting of MPC members. Kristin Forbes has disagreed with the consensus view of holding rates at all-time lows of 0.25% at the past two meetings and with today’s event marking her last opportunity to vote on rate changes, it’s likely she will once more object. However with every other member at present in agreement that rates should be kept on hold and Forbes’ term coming to an end, there will have to be a remarkable shift in mindset for rates to rise in the foreseeable future.

The absence of any other dissenters today in spite of the recent increases in inflation would keep the bank on a dovish path and fail to provide much support to the pound. Money manager Pimco has warned this morning that the risk of a UK recession during the secular horizon (3-5 years) “appears high” and with Brexit looming, the economy remains in a precarious position. The BoE will no doubt be aware of this and hence will be reluctant to reign in monetary stimulus unless absolutely necessary. The tolerance of Carney & Co for above-target inflation may have to be extended somewhat for fear of hawkish action bringing forward the risk of a recession.

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