Update; Retail sales have indeed disappointed forecasts – and significantly. Monthly sales continued to fall in January, declining -0.3%. This was a slowdown on December’s -2.1% fall, but still a marked undershoot on the -0.9% forecast. Annual sales grew 1.5% against forecasts of 3.4%.
Original article continues below…
The final UK data this week could further sour the outlook for the UK economy and weaken Pound Euro and Pound US Dollar exchange rates if it shows weakening retail activity.
Consumer spending is the key driver of the UK economy, so signs that households are reigning in their expenditure would bode ill for the economic outlook.
Eurozone data will follow shortly after. Construction output across the entire currency bloc is expected to have grown 0.6% in December on a year-on-year basis. Activity in the sector had previously stalled in November.
From then on, the Eurozone data calendar is largely empty; as is that of the US. Only low-impact leading indicators and the Baker Hughes rig count are set for release.
This could help the Pound to stay dominant over the Euro and the US Dollar. Neither currency will benefit from strong domestic drivers, with political concerns still weighing on EUR in particular.
Investor focus will likely remain on long-term headwinds; specifically the Greek debt crisis, the potential for far-right politician Marine Le Pen to win the French Presidency and the European Central Bank’s (ECB) reluctance to reign in monetary stimulus.
Inaction could also be a key driver of US Dollar trade going into the weekend. With little to support it higher, the ‘Greenback’ could mirror the performance of US stock markets and weaken as investors lock in their profits.
Market opinion is beginning to seesaw on the likelihood of President Donald Trump unleashing bold fiscal stimulus plans to accelerate growth and bolster the labour market.
The US Dollar has enjoyed solid gains since his shock election victory on the prospect of new spending measures – and the impact they would likely have on the pace of Federal Reserve monetary policy normalisation.
Investors briefly fell off the stimulus bandwagon last week, but it seems, after climbing back on, the new worry is not whether Trump will try to stimulate the economy, but whether his proposals will actually make it through Congress.
Stocks are falling because investors are taking the opportunity to lock in profits in case the fabled stimulus measures don’t materialise. The US Dollar could follow suit.
While the Euro and US Dollar could pave the way for the Pound to advance further, this is assuming the latest retail sales figures print positively.
Poor sales growth figures would further cloud the outlook for household spending, which has already taken a knock from other data this week.
Inflation grew, but markets did not view the acceleration as sharp enough to force the Bank of England (BoE) to hike interest rates in response.
Meanwhile, wage growth slowed in the three months to December instead of accelerating, suggesting household budgets will feel increased pressure in the coming month as prices continue to rise.
GBP EUR is currently trading around 1.17 and GBP USD is currently trading around 1.24.