Mixed Week For Sterling, Rough For The Dollar
CONCERNS ABOUND FOR UK RETAILS SALES & CONSUMER CONFIDENCE
This week saw much stronger-than-expected out-turns for June's Retail Sales and the July Manufacturing and Services PMIs, providing support for forecasts of a V-shaped recovery. Unfortunately, this was not enough to lift Sterling against the Euro. This is because, despite the positive June Retail Sales picture, there continues to be concerns about its sustainability given consumers’ concerns about both the virus and an uncertain employment picture. With some anecdotal reports from retailers pointing to a slowdown in activity following the initial post-lockdown surge, it will be interesting to see if this shows up in the July CBI Retail Survey. Also, after a disappointing unchanged reading from the initial July GfK consumer confidence measure, the final update will be watched for some improvement.
Viewed in the above context, Sterling's gains against the US Dollar this week, are therefore simply a reflection of increased risk appetite and a fall in the Dollar itself - rather than an improvement, necessarily, in the market's perception of the future prospects for the UK economy - especially bearing in mind, this week's reports of a trade deal with the US being unlikely this year.
EUROZONE DATA
Q2 GDP data for the Eurozone as a whole (Fri), and for the some of the largest countries including Germany (Thu), are scheduled for release in the coming week. Heady declines are expected, with the consensus estimate looking for a 12% drop across the region as a whole. However, the market reaction to that may be small as timelier data suggests that growth is picking up and this week’s EU summit agreement on a fiscal package provided a further boost to sentiment. Monday’s German IFO survey is a timelier estimate of conditions. Following stronger-than expected July PMI data, markets will be looking for another upbeat report.
DOLLAR WOES CONTINUE WITH Q2 GDP EXPECTED TO POST BIG DECLINE Sterling has also risen against the US dollar despite ongoing uncertainty about the progress in talks between the EU and the UK on their future relationship. Concerns about US economic conditions has prompted a fall in US Treasury yields led by a decline in real yields. The market seems to be giving a rising probability to the US Federal Reserve needing to do more to support economic growth. The US dollar has continued to slide particularly against the euro, which has touched above 1.16 against the ‘greenback’.
Next week is a busy one for US data releases. Particularly notable will be the first estimate of second quarter GDP (Thu). It is expected that the US economy posted a record decline in Q2 (we look for a 33.5% annualised drop), reflecting the impact of much the economy being in lockdown right through April and for some of May. However, while the forecast fall is very large, it is less than some estimates made in the early stage of the pandemic due to the rebound in late May and through June. Consequently, unless the number surprises significantly on the downside it may generate little reaction from markets, which are now focused more on whether growth is faltering in July. Potentially of more significance for markets may be Thursday’s weekly jobless claims. This week’s reading noted the first rise since March. While it seems unwise to read too much into one week’s data, another increase may reinforce concerns around the outlook.
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