Data on retail sales in the UK in July exceeded the expectations of economists.
Retail sales in the UK in July, the first month after the referendum on Brexit, grew by 1.4% and by 5.9% y-o-y (it expected to grow by 0.2% and 4.2%, respectively).
In response to the publication, GBP/USD pair rose over 100 points reaching a nearly 2-week high near the level 1.3175. The data turned out to be an unpleasant surprise for investors who anticipated the reduction of the pound and GBP/USD pair.
Two factors contribute to the growth of GBP/USD pair today: the publication of the July FOMC minutes and retail sales data for July in the UK. In the FOMC minutes released yesterday, investors found no clear signals of intention to increase the interest rate in the US in September. The minutes showed that there is no consensus between the leaders of the Fed about monetary tightening in the US in the coming months. The Fed did not take on the obligations regarding the rate increase, making it clear that it will depend on the incoming US macroeconomic indicators. The WSJ The US Dollar Index, which tracks the dollar rate against a basket of 16 currencies, fell 0.1% immediately after the publication of the minutes.
Recent weak data on GDP and labor productivity in the US in Q2 complicate making the decision about the rate hikes. The probability of increasing rates in the US in September is currently estimated at about 12%. The rate will be most likely raised in December by 0.25%. The president of the Federal Reserve Bank of St. Louis James Bullard also said Wednesday that this year he expects the rate to be increased only once, by a quarter of percentage point, and this could happen any month until the end of the year.
Nevertheless, in spite of the current strengthening, the continuing uncertainty about the future of the UK economy will continue to put pressure on the position of the pound on the foreign exchange market in the medium term. Gloomy predictions of many economists point to a fall in GBP/USD pair to around 1.2000 by the end of the year and the level 1.1000 by the end of 2017. And any strengthening of GBP/USD pair will be treated by many investors as another opportunity to open short positions.
The decision of the Bank of England with respect to monetary policy in the UK will be taken at the next meeting of the Bank on September 15.
Today, investors are also waiting for the release of the minutes of the last ECB meeting on 20-21 July at 14:30 (GMT + 3). Market participants are interested in what and how members of the Governing Council discussed after the decision of the UK to leave the EU.
Later, at 15:30 we will see the data on initial jobless claims in the US last week and at 17:00 - the leading indicators index for July in the USA.