Why the pound cant rely on economics for a lift

Today’s retail sales data was a touch better than expected, however, a 0.1% gain in October for retail sales does not bode well for the all-important Christmas shopping season. The news on retail was the culmination of a busy week for UK economic releases, with CPI and labour market data released in recent days. None of the reports made for blissful reading: CPI is still at 3%, wages remain weak and retail sales are impacted by a hobbled consumer.

The impact on the pound from these monthly releases is worth investigating. Using the EMCI function on Bloomberg I have found that on average for the last 12 months these three crucial data releases have all had a mildly negative impact on the pound in the 30 minutes immediately after the data is released. You can see this in charts 1- 3 below, with the average reaction in the pound represented by the white line on each chart.

Interestingly, the downside reaction is fairly small, -0.01% for CPI, -0.025% for the unemployment rate and -0.015% for retail sales. You could argue that the pound has been most sensitive to the labour market data over the past year. What makes this even more interesting, the record low in unemployment does not seem to be boosting the pound, perhaps because the wage data has been so disappointing over the same time period.

Why is US economic data positive for the pound?

This is in contrast to the US, where the CPI data, on average, leads to a short term rise in the dollar, even though inflation data in the US is considered to be weaker than it should be. The dollar also tends to rise in the immediate aftermath of a labour market report, with Non-Farm payrolls triggering an average increase of 0.04% in the buck. However, there is a notable larger increase in dollar upside when NFPs are above 200k. In fact, the largest gain for the dollar in the aftermath of a US Labour Market report was back in March, when payrolls jumped 235k and the dollar jumped some 0.3%.

Interestingly, the pound does not seem to benefit from such an uplift, even when economic data surprises on the upside. Take UK retail sales, Nov 2016 saw a massive 4.8% rise in sales on the year, however, the pound actually fell 0.06%, likewise, in March 2017 it also saw a 2.16% increase in YoY sales, however the pound was down 0.01% 30 minutes after the release. This suggests that today’s 0.04% gain in GBP post the retail sales report, where sales were only a touch better than expected, was driven by factors other than the retail sales report.

What conclusions can we draw?

• The dollar appears to get more of an uplift on the back of better than expected US economic data compared to the pound, which does not appear to be particularly sensitive to UK economic releases.
• One reason for this could be that the FX market is more optimistic about the fortunes of the US economy relative to the UK economy.
• Another reason for the pound’s relative insensitivity to UK economic releases such as retail sales, is that retail sales tend to be quite erratic. Also, the Brexit process is causing a lot of uncertainty around the economic outlook, which could also limit the pound’s reaction to UK economic data releases in the coming months.

Overall, we can say that on balance the pound remains relatively insensitive to UK economic data, although the key data releases including CPI, unemployment and retail sales tend to have a dampening impact on the pound, even if data is better than expected. So, if you expect GBP/USD to rise to 1.35 and beyond before year end, don’t rely on economic data releases to generate upwards GBP price momentum, the pound is being driven by factors other than economic fundamentals.

Chart 1: GBP reaction and CPI

Source: City Index and Bloomberg

Chart 2: GBP reaction to the unemployment rate

Source: City Index and Bloomberg

Chart 3: GBP reaction to retail sales

Source: City Index and Bloomberg