The pound rose versus the dollar but fell against the euro on Wednesday after gaining modest support after the Bank of England struggled to find sellers of gilts from which to kick-off its quantittaive easing programme, with a result that interest rates remained higher than expected.
- Pound to Euro Exchange Rate Today: 1.1684
- Euro to Pound Sterling Exchange Rate Today: 0.8558
- Pound to Dollar Exchange Rate Today: 1.3056
The pound traded mixed on Wednesday recovering some ground against the weaker dollar but leeching lower versus the more robust euro.
Some analysts attributed the little fillip of strength to the Bank of England (BOE) struggling to find sellers of gilts on Tuesday.
This kept gilt yields higher, underpinning support for interest rates.
The pound like most currencies gains support when yields and interest rates stay high as they tend to attract more foreign capital.
Other news, however, maintained the pressure on the sterling after an estimate of GDP in the three months up until July showed that the economy grew by only 0.3%, below the 0.6% forecast.
Pound shrugs off better-than-expected retail sales figures as McCafferty turns dovish
Pound sterling had weakened on Tuesday spite of figures released by the British Retail Consortium (BRC) on Tuesday showing a higher-than-expected 1.1% rise in retail sales in July, compared to July in the previous year.
This was well above the -0.7% analysts had forecast based on expectations spending might be subdued in the aftermath of Brexit, however, it appeared shoppers were taking a “life goes on” attitude to the referendum vote and sales actually rose.
Part of the reason was the heatwave in July which increased sales of barbeques, food and fashion items, and the data came with the proviso that sales were stimulated by heavily discounted prices, which were at similar levels to those seen in 2009 during the great recession, however, it would have been expected that the data would show a fall in sales not rise after Brexit.
BRC Chief Executive Helen Dickenson commented that, “This month’s solid sales figures may come as a shock to some, given the slew of early indicators suggesting that consumer activity was slowing in the wake of the referendum result,”.
“However, little has materially changed for most UK households [since] 23 June, so it is not surprising to us that sales are simply responding to their normal underlying drivers.”
There was also evidence suggesting some of the rise in sales could be as a result of a rise in tourism from China and the US due to tourists taking advantage of the fall in the pound, according to research company ForwardKeys.
Sales of outbound plane fares for example fell, but those for inbound flights rose; sales of jewellery and watches also rose unexpectedly, further evidencing increased buying by tourists.
A consumer confidence survey also revealed a cautious mindset amongst consumers that belied the July splurge, after it was revealed that over 50% were not confident about spending on nonessentials in the future.
The pound actually accelerated its decline following the BRC release, falling to 1.2980 versus the dollar - below the key psychological 1.3000 level and to 1.1719 versus the euro, from 1.1760 before.
The weaker pound may well have been as a result of comments from BOE official and voting member of the rate setting committee Ian McCafferty eclipsing the BRC data.
McCafferty was reported in the Times as saying the BOE could cut interest rates even closer to zero and increase QE if data continued to be negative for the post Brexit period.
The comments, coming from one of the most hawkish members of the BOE (hawkish means favouring higher interest rates) reflected a large change in stance to a more dovish outlook (dovish means in favour of cutting rates).
A further factor weighing on the pound was probably news from Reuters that investors were rushing to sell their Gilts to the BOE after it announced it was increasing its quantitative easing programme by 70bn (60bn Gilts) at the August meeting.
Quantitative easing involves the purchase of bonds such as Gilts, which are UK government bonds, to the BOE in order to keep interest rates low and increase liquidity in the banking system to help increase lending into the real economy.
A fall in Gilt yields and broader interest rates, however, is negative for the pound as it detracts from inbound investment as international investors prefer countries with rising not falling rates of return.
The break down to 1.2980 in GBP/USD is a significant move since it challenges the authority of 1.3000, and almost confirms another leg lower in the 1.28s.
The pair had been attempting to form a bottom pattern, which looked for a while like an inverse head and shoulders, which is a bullish reversal pattern, however, it failed after the pair weakened below 1.3100 and has now been negated completely.
The expectation is now for a continuation down to the next target at 1.2860 where the S1 monthly pivot is situated, a level used by traders to gauge the trend and which acts as a support zone in a down-trend. At that level the pair is expected to stall and possibly bounce.
As for GBP/EUR, that too has weakened yet further, on its way down to our eventual target at 1.1600 just above the 1.1586 July lows.
It is currently trading at 1.1714, so has further to go, however, the main trend remains down and likely to extend, whilst according to a form of cycle analysis called Elliot Wave theory the pair is also likely to reach the same level as the July lows, if not lower.