Talking Points

- UK Retail Sales grew strongly in August, beating all market expectations.

- FOMC meeting is expected to outline the sequence and timing of Fed monetary tightening.

- UK PM Theresa May’s speech in Florence at the end of the week may give Sterling an additional boost.

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The British Pound got a strong upside boost Wednesday after UK Retail Sales beat market expectations with ease. Sales rose 1% month-on-month against expectations of a flat reading and compared to an upwardly revised 0.7% in July, while year-on-year growth rose to 2.8% against expectations of 1.4% and last month’s upwardly revised 1.7%.

Commenting on today’s official retail figures, Kate Davies, ONS Senior Statistician, said:

“Within this month’s retail sales we are seeing strong price increases across all store types compared with a year ago, reflecting wider inflationary pressures. However, we are still seeing underlying growth in sales volumes, and with strong growth in non-essential purchases as consumers continued to buy more from non-food stores.”

This latest data underpins, and vindicates, last week’s hawkish tone by the Bank of England that fuelled thoughts of a UK interest rate hike as soon as November this year. The UK central bank indicated that it is now prepared to look through weakness in the economy and focus its attention on consumer price inflation, which is expected to hit 3% within the next couple of months.

Sterling’s short-to-medium-term fate however will likely be decided by two events out of the central bank’s control: today’s FOMC meeting and updated economic projections and Friday’s speech by UK PM Theresa May to European dignitaries in Florence.

The Federal Reserve is expected to outline how and when it will start reducing the country’s USD4.5 trillion balance sheet and will indicate, via the Fed Dot Plot, expectations of the next interest rate hike. Market expectations are mixed as to whether the Fed will hike again this year, while there are growing calls for three hikes in 2018/19.

On Friday, UK PM Theresa May will speak to European dignitaries in Florence and look to break the current Brexit deadlock. With the Conservative Party seemingly split on a hard/soft Brexit, the UK PM is expected to outline a financial offer to the EU in the region of GBP18-20 billion, according to media sources, to cover the UK’s obligations to the EU, in the hope that it will kick-start trade negotiations.

Chart: GBPUSD Five-Minute Timeframe (September 20, 2017)

GBP Jumps on Strong Retail Sales Ahead of FOMC, Brexit Speech

Chart by IG

The latest CFTC speculators’ report shows that GBP/USD shorts dropped on a weekly basis from -52,927 to -46,085 as the BOE’s hawkish twist seeped into the market.

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--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

Follow Nick on Twitter @nickcawley1