Pound Weakens Versus Euro After Retail Sales Miss Estimates

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The pound fell for a second day versus the euro after U.K. retail sales increased less than economists forecast in July.

Sterling halted a two-day gain versus the dollar. The slowing momentum in consumer spending bolstered speculation that the Bank of England may delay raising interest rates. The volume of sales including auto fuel rose 0.1 percent from June, the Office for National Statistics said. Analysts estimated a 0.4 percent increase, according to a Bloomberg survey. Excluding auto fuel, sales climbed 0.4 percent.

“The data comes on the back of evidence that the earnings growth is slowing at time where cost pressures maybe returning and that is eroding the real purchasing power of the U.K. consumer,” said Valentin Marinov, London-based head of Group-of-10 foreign-exchange strategy at Credit Agricole SA. “By implication the release could strengthen the case for more cautious BOE rather than more hawkish BOE from here.”

The pound weakened 0.8 percent to 71.46 pence per euro as of 4:06 p.m. London time after depreciating 0.7 percent a day earlier. Sterling dropped less than 0.1 percent to $1.5673, after strengthening 0.6 percent in the previous two days.

The U.K. currency is still above the level implied by the yield spread between two-year U.K. government securities and U.S. notes, which is $1.54, Marinov said.

“The risks for pound-dollar are on the downside from here,” he said. “In the case of euro-pound, the release could trigger a temporary short-squeeze only.”

Rate Outlook

Forward contracts based on the sterling overnight index average, or Sonia, signal a 25 basis-point increase to the BOE’s 0.5 percent main rate in August 2016.

U.K. government bonds advanced with U.S. Treasuries after minutes of the Federal Reserve’s July meeting released on Wednesday showed officials didn’t consider conditions for the first rate increase since June 2006 to have yet been reached. The U.K. Debt Management Office sold 1.5 billion pounds of gilts due in March 2036 at an average yield of 2.421 percent, up from 2.067 percent at a previous 20-year auction in January.

Benchmark 10-year gilt yields fell eight basis points, or 0.08 percentage point, to 1.75 percent. The 5 percent security due in March 2025 rose 0.81, or 8.10 pounds per 1,000-pound face amount, to 128.43.

“We suggest going long the 2036s against 10-year and 50-year gilts given the degree to which it has cheapened,” Jason Simpson, a fixed-income strategist at Societe Generale SA in London, wrote in a note to clients before the auction result. A long position is a bet an asset will appreciate.