Pound slumps on dollar strength, retail sales data

The pound lost ground on Tuesday, with the dollar boosted by growing expectations that the Federal Reserve will hike interest rates sooner than anticipated, as disappointing UK retail sales figures and Brexit concerns also weighed.

At 1105 GMT, sterling was down 0.8% to $1.2368, with the greenback underpinned by the latest comments from Federal Reserve Bank of Philadelphia President Patrick Harker, who said in a speech on Monday that March was “on the table” for a possible rate hike, depending on the economic data that comes out between now and then.

Harker pointed to last week’s strong non-farm payrolls report and continued good news surrounding GDP growth.

Neil Wilson, senior market analyst at ETX Capital, said: “Having treaded water around $1.246, cable sank to $1.2347 as the dollar was bid up to the max this morning. The dollar index was up above 100 having gained around 0.7% today. Traders in the City seem to have woken up to the prospect of the Fed tightening interest rates quicker than they’d thought, after Philly Fed president Patrick Harker said he would support hiking rates in March. That’s thrown the cat among the doves a bit as the last FOMC meeting suggested the Fed was not likely to raise rates until the summer. The rally in safe haven assets seems to have stalled and traders are piling back into long dollar positions.

“There is also a touch of softness around sterling after the BRC said retail sales growth cooled markedly in January after the December splurge. To be expected perhaps, but with UK growth a consumer-led phenomenon at present these retail sales figures are crucial.”

January's BRC-KMPW retail sales monitor showed sales dropping 0.6% on a like-for-like basis, with total sales rising 0.1%.

The sector fared badly in comparison to the strong start last year, when LFL sales increased 2.6% and total sales 3.3%, while total sales were well below the 3-month average of 1.1% and the 12-month average of 0.9%.

Over the last three months, LFL food sales increased 0.6% and 2.0% on a total basis, above the 12-month average.

It wasn’t just dollar strength and retail sales weighing on sterling, however, as Parliament voted on the Article 50 bill.

Late on Monday, the House of Commons voted against four amendments proposed by Labour, the SNP and Plaid Cymru to the ‘Brexit bill’, which will give the government the right to trigger Article 50 and kick off formal negotiations to leave the EU.

The rejection of the amendments, that included calls for greater scrutiny of Bexit negotiations and for consultations to devolved governments in Scotland, Wales and Northern Ireland, is a boon to Prime Minister Theresa May that the bill we passed and will not be changed much when passed to the House of Lords on Wednesday.

Rabobank said it sees several factors as contributing to the drop in the value of the pound on Tuesday.

“Firstly short positions have dropped recently with PM May's speech in the middle of January shoring up confidence in the government's Brexit plan. CFTC data suggest that last week speculators’ short sterling positions were down about 35% from their post referendum highs. This paring back of shorts will have made the pound more susceptible to bad news.

“Last week, BoE Governor Carney disappointed some investors by steering away from a hawkish tone during his Inflation Report press conference. Carney emphasised that higher prices were due mostly to the post referendum drop in the pound and that these would eat into consumers' real incomes, slowing demand and growth. There are signs that this is already happening. The recent release of official December retail sales data were shockingly weak at -1.9% m/m and overnight the BRC January survey highlighted a -0.6% m/m drop in like-for-like sales.”