Pound Bounces on Retail Sales but Remains Exposed to BoE Repricing
GBP/USD is holding above recent lows after UK retail sales data showed a surprise rebound in August. The British Pound has been volatile, but this latest news has given it some much-needed support. According to Brown Brothers Harriman's (BBH) Elias Haddad, the August retail sales figures beat expectations, reversing July's decline and firming up market pricing for a November Bank of England (BoE) rate hike.
Haddad notes that total retail sales volumes increased 0.5% month-over-month in August, compared to a consensus forecast of -0.2%. Excluding automotive fuel, retail sales were up 0.6% in August, exceeding the expected decline of -0.2%. This has pushed the odds of a 25bps BoE rate hike in November to as high as 90%, from 83% previously.
However, Haddad cautions that the BoE may not need to tighten monetary policy as much as markets expect. The UK economy is already operating below capacity, and Bank Rate at 3.75% is near the top of the BoE's estimated neutral range of 2-4%. Additionally, fiscal policy will likely become more restrictive, which could also limit the need for rate hikes.
Haddad concludes that the GBP remains vulnerable to a dovish BoE repricing, citing the swaps curve that implies about 100bps of BoE rate hikes in the next twelve months to 4.75%.