UK retail sales shocker pushes Sterling down...

Week Commencing Monday 27th July 2015

Overriding Market Themes

Last week was somewhat dull on the economic data front, with UK retail sales dominating the wires. GBP slipped against the USD and EUR after the Office for National Statistics said UK retail sales volumes dipped by 0.2 percent compared with May. Economists had expected a rise of 0.4 percent. On an underlying basis the picture for retail sales remains strong however; with growth rising 0.7 percent in the three months to June (interestingly, this is the 28th quarterly gain and the longest stretch of gains since records began). Persistently low inflation and stronger wage growth are leaving the general population with greater spending power and helping support retail expansion.

Indeed, policymakers are still relatively bullish about the economic outlook for the UK, but are divided over the robustness of a recent pick-up in wages which is needed to sustain growth and return rock-bottom inflation to more normal levels. Economists are confident that lower prices, the fastest wage rises in five years and high levels of employment would help sales pick up from what they viewed as a temporary dip in an often-volatile series of data.

Moving to Greece now, Greece has taken a crucial step towards a bailout after its parliament passed a second set of reforms. There had been fears of a rebellion by MPs but Greek Prime Minister Alexis Tsipras was easily able to muster the support required. In total, the measures received 230 votes in favour and 63 against with five abstentions. The second set of measures are more structural in nature, including a code of civil protection aimed at speeding up court cases, the adoption of an EU directive to bolster banks and protect savers' deposits of less than €100,000 and the introduction of rules that would see taxpayers indemnified over the costs of bailing out a failed bank.

On Wednesday, the European Central Bank increased its cash lifeline to Greek banks, making available an extra EUR 900m to the financial system.

GBP This Week

In an otherwise quiet week for the UK in terms of data and events, most eyes will focus on second quarter GDP on Tuesday. We expect to see a quarterly growth of 0.6 percent, which is slightly below market expectations of 0.7 percent. Also on the horizon, we expect mortgage approvals to edge up somewhat in June to 66.5k and mortgage lending to increase to GBP 2.2 billion. Consumer credit is also expected to increase by GBP 1.1 billion.

Overall, we remain reasonably comfortable with our view of modest GBP growth versus the EUR, but material depreciation against the USD

USD This Week

The FOMC rate decision on Wednesday, first Q2 estimate of GDP on Thursday and the Employment Cost Index Friday are the main events for the week ahead. Materially, the FOMC statement should not change anything however the rhetoric will continue to fascinate the market. Any further hawkish comments will likely be seized upon and give the greenback more reason to gain versus its G10 peers.

GDP should also be interesting; with estimates of Q2 GDP to confirm that the Q1 weakness was mainly down to seasonal factors. We expect a 3 percent year on year figure compared with the 2.5 percent market expectation.

EUR This Week

Euro area inflation should be the highlight this week on the data front, where we expect a 0.1 percent print. We also believe that the ECB will continue its monthly asset purchase program at the same pace until September next year, especially in the face of such persistent low inflation.

Geo-politics should continue to dominate, despite the general consensus in Greece these days. We continue to monitor dissent in the Greek government and should significant anti-austerity support start gathering pace, we should see some significant EUR weakness.


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