Photographer: Luke MacGregor/Bloomberg

Pound Falls on Retail Data, Hammond's New Manifesto Comments

  • U.K. retail sales post biggest quarterly drop since early 2010
  • 2015 manifesto constrains ability to manage economy: Hammond

The pound declined versus all but one of its Group-of-10 peers on weaker-than-forecast U.K. retail sales data and after Chancellor of the Exchequer Philip Hammond said the government needs to “restate” its fiscal mandate in the next parliament.

Sterling pared its biggest weekly advance this year against the dollar after data showed retail sales recorded their largest drop in seven years in the first quarter. The U.K. currency extended its decline after Hammond said in Washington that the 2015 Conservative Party manifesto limited its ability to manage the economy.

“If you say something like that without giving detail, the knee-jerk reaction is to assume the worst and sell quickly, then buy back later if you’re wrong,” Stuart Bennett, head of G-10 currency strategy at Banco Santander SA in London, said, referring to Hammond’s comments. “The move following the announcement of the election doesn’t really make sense to me. We might just be in a period of steady unwinding, so any excuse to take it down.”

  • The losses eat into a second weekly advance versus the dollar, after the U.K. currency rallied following Prime Minister Theresa May’s surprise announcement Tuesday of a snap election on June 8. May’s move was perceived by markets to reduce the prospects of a chaotic exit from the European Union
  • GBP/USD falls 0.2% to 1.2786, after touching 1.2757. GBP/USD reached a more than six-month high on Tuesday and is on course for a weekly gain of 2.1%, the biggest since November
  • Resistance at 1.2860, April 19 high; Support at 1.2728, Dec. 13 high
    • EUR/GBP climbs 0.1% to 0.8369
    • Yield on 10-year gilts declines 3bps to 1.04%
  • The call for an election in the U.K. has done little to change the EU’s negotiation stance, with Britain being consistently rebuffed by the ruling party in Germany’s administration
    • The snap election is unlikely to be “fundamentally supportive of sterling. Britain’s bargaining position in its negotiations with the EU is unlikely to improve, even on the back of a more unified stance by the U.K. government,” analysts at UniCredit SpA write in a client note
    • The pound is likely to struggle due to the weakening economic outlook and the uncertainty around the Brexit talks, UniCredit analysts say, adding that the recent sell-off in EUR/GBP is a “good buying opportunity. In our view, the bounce in sterling is a result of a short squeeze rather than a structural, long-lasting shift”

— With assistance by Sejul Gokal

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