British Pound Rebounds From Three Week Low

The pound sterling gained 0.6% against the greenback to trade at 1.2430 after declining to a three month low of $1.2337 in the earlier trading session, backed by a weak greenback, chances of a Brexit trade deal and optimistic economic data.

Notably, both the French President Emmanuel Macron and the EU chief Ursula von der Leyen are hopeful of finalizing an agreement on Brexit after the recent discussions and latest info indicated that retail sales rose at a historical high of 12% in May, higher than twice the Consensus estimates of a 5.7% increase.

A week before, the Bank of England maintained the interest rate unchanged unaltered at 0.1% and increased the quantum of asset purchases but decreased the rate of bond-acquisition, crushing anticipations of negative interest rates.

In the meanwhile, the BoE Governor Bailey signaled at a shift in the central bank’s plan to limit urgent stimulus and stressed the necessity to minimize the balance sheet before boosting interest rates.

The Confederation of British Industry revealed that the overall order backlog index improved to -58 in June 2020, from more than 38-year low of -62 in the earlier month. In spite of that, it was the lowest figure since July 2009, against the backdrop of Covid-19 pandemic.

Additionally, the reading for output for a three-month time span worsened to a new record low of -57, from -54 in May. While export order books decreased to a low of -79, from -55, stocks of finished goods growth fell to 20, from 23 in the earlier month. Average selling prices are anticipated to decline at a slower pace, with index reading improving to -10 in June, from -20 in May.

The budget deficit was £54.50 billion in May, compared to a deficit of £5 billion a year back and greater than anticipations of a £47.30 billion shortage. The reported figure reflects another record budget deficit mainly due to the roll out of public health initiatives and changes in government policies to back enterprises and individuals during the Covid-19 pandemic.

Barring public sector-owned banks, borrowing was £55.20 billion, nine times higher than in May 2019. It is also the largest borrowing ever recorded.

Between April and May 2020, borrowing was £103.70 billion, up £87 billion greater than in the comparable period of 2019, also representing the highest ever borrowing in April-May period.

Notably, borrowing in April was downwardly revised by £13.60 billion to £47.80 billion, mainly due to greater than earlier assessed tax receipts and National Insurance funding and lower expenses than earlier estimated for Covid-19 Job Retention Scheme.

Retail sales soared 12% m-o-m in May, the highest ever documented, surpassing market forecasts for a 5.7% increase and rebounding from a record 18% dip in the earlier month. Non-food stores delivered the biggest positive contribution, assisted by a 42% rise in household items sales such as Paints, hardware and glass. The percentage spent online jumped to a new record high of 33.4% in May, compared with 30.8% in the earlier month. Still, Retail sales dropped 13.1% in the same period last year.

The Bank of England voted collectively to leave the benchmark interest rate at a historical low of 0.1% earlier this month, in accordance with economists’ expectations. With an overwhelming 8-1 vote, policymakers also supported increasing the purchase of UK government bonds, funded by central bank reserves, by an extra £100 billion, to increase the total quantum of asset purchases to £745 billion.

The scheme is anticipated to be completed by the end of the year. The central bank will carry on with prevailing scheme of purchasing UK government bond and sterling non-financial investment-grade corporate bonds to the tune of £200 billion.

Lawmakers further stated that the decline in global and the UK GDP in the second-quarter will be slightly lesser than expected even though the outlook stays remarkably unforeseeable and the economy, particularly the labor market, will take additional time to rebound. The central bank has indicated its willingness to take additional action as required to support economic activities.