Retail sales were a key driver of pound strength this morning after sales, including autos, rose at their fastest annual pace for 10 years. This growth was broad-based across the sector, and, with the exception of petrol stations, all stores saw year-on-year increases in sales volumes.
The stand-out sector was food, which saw its fastest annual growth for 12 years. According to the Office for National Statistics (ONS) who gathered feedback from the food stores, it was a strong Easter and better weather that helped to boost sales. The weather has remained good in May, which may fuel expectations that this al fresco dining will continue, and retail sales could remain strong in the coming months even without the help of the Easter Bunny.
But while the quantity that has been bought has increased, the prices we have paid have actually moderated, as retailers’ promotions have reduced the rate of food store price inflation to 0.9% in April from 1.8% in March. Online sales also increased by a healthy 13.3%, compared with 2.6% in March.
The ONS also made a note of the upward revisions to the March data, sales including autos were revised up to 0.5% from an initial 0.1%, the ONS put this down to late collection of the March data.
The FX market couldn’t get enough of retail sales and GBP/USD broke back above 1.6900 on the back of the sales report. The high so far is 1.6920, and today’s move reinforces the end of GBP/USD’s consolidation period, which saw this pair back away from 1.70 earlier in May. The other boost to sterling came from the Bank of England minutes.
The BOE votes in unison for now, but for how long?
Although the BOE voted in unison (9-0 to keep rates and QE on hold) the tone of the minutes was slightly more hawkish than we have come to expect. At the end of the minutes it was noted that “for some members the monetary policy decision was becoming more balanced”.
Thus, if the pace of rates hikes is to be slow and steady, as BOE Governor Carney said during last week’s Inflation Report, then some members want rates to rise earlier than expected. This helped to push up Gilt yields to their highest level since last week’s Inflation Report, however, the GBP overnight index swap market still points to the first rate increase in April 2015, down from March 2015 pre last week’s IR.
Changing of the guard at the BOE
The minutes suggest that Carney’s dovish tone from last week is not universally shared by the MPC, thus it will be interesting to see if the committee continues to vote in unison going forward. Worth noting, is the change in members at the MPC in the coming months.
This could increase policy volatility in the second half of this year and could keep things in the pound interesting, especially as we approach key levels in GBP/USD.
Housing fears, what housing fears?
The other eye-catcher in the minutes was comments regarding the housing market. The bank does not seem overly concerned that a housing bubble is about to explode and ruin the recovery. Instead, the BOE sounded fairly sanguine, noting a fall in mortgage approvals and more stringent bank lending criteria, although it did note a potential shortage in supply, particularly in London.
So, don’t expect rate hikes to pop a housing bubble any time soon, even if house prices continue to rise at an 8% annual rate (according to the ONS).
The GBP/USD View:
The macro data was sterling supportive this morning and the general malaise in the dollar also helped the pound to make up some lost ground. As we have mentioned, the uptrend in the pound remains intact after the recent period of consolidation proved to be short-lived. Key support has managed to hold including 1.6728 – the 50% retracement of the March – May advance.
The economic data seems to support a move back above 1.70, however the market may not play ball. We have already retreated from the 1.6921 highs from earlier this morning, and the overall lack of volatility in the FX market has kept major pairs like GBPUSD confined to tight ranges. Thus, 1.70 (or, to be more precise, 1.7043 – the high from August 2009 and a key resistance zone) may be harder to achieve than first thought, especially as we lead up to the summer months.
So what is a trader to do? At this stage we still recommend trading the range. Short term support lies at 1.6802 – the low from 20th May, which could cushion any downside, below here opens the way to 1.6728 – the Fib support level mentioned above. On the upside, 1.6996 – the high from 6th May, could attract some selling interest, and if we get above here then 1.7043 comes back into view.
Figure 1: 
Source: Bloomberg and FOREX.com