Pound Advances After Report Shows Retail Sales Unexpectedly Rose

By Emma Charlton - Aug 16, 2012 11:27 PM GMT+0800

The pound rose to its strongest level against the dollar in more than two weeks after U.K. retail sales in July increased more than analysts forecast and June data were revised upward.

Britain’s currency advanced against 13 of its 16 major counterparts as research group Capital Economics Ltd. said the data add to evidence that Britain’s economy may have shrunk less in the second quarter than the 0.7 percent contraction previously estimated by the Office for National Statistics. Updated gross domestic product data is due to be released on Aug. 24. Gilts were little changed after a sale of 1.5 billion pounds ($2.4 billion) of 4.5 percent bonds maturing in September 2034.

“Sterling has gone up on the back of the huge surprise in retail sales data,” said Gavin Friend, a markets strategist at National Australia Bank (NAB) in London. “This is good news, and suggests the economy may not be as weak as we had thought.”

The pound gained 0.4 percent to $1.5743 at 4:16 p.m. London time, after weakening as much as 0.3 percent. It jumped to as high as $1.5744, the most since July 30. Against the euro, sterling weakened 0.2 percent to 78.50 pence, after reaching 78.13 pence, the strongest level since July 31.
Sales including auto fuel gained 0.3 percent from June, the Office for National Statistics said today in London. The median forecast of 22 economists in a Bloomberg News survey was for a 0.1 percent decline. Sales in June were revised to a 0.8 percent gain from a 0.1 percent increase.

Gilts Sale

Britain’s currency has advanced 0.8 percent in the past week, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar was little changed and the euro climbed 0.5 percent.
The 10-year gilt yield was little changed at 1.69 percent. The 2034 securities were sold at an average yield of 2.786 percent, the U.K. Debt Management Office said. Investors bid for 1.98 times the amount of securities allotted, it said. That compared with a ratio of 2.06 times at a sale of 4.75 percent debt due 2030 on July 3.
“Today’s U.K. gilt auction was well received,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, wrote in a note to clients.
Other reports have shown the U.K. slump may not be as deep as forecast. Jobless-benefit claims unexpectedly fell in July, data showed yesterday, while industrial output figures for June released last week dropped less than estimated.

Momentum Struggle

“Second-quarter gross domestic product may have contracted by about 0.4 percent, rather than the 0.7 percent initially estimated,” because of the data, Vicky Redwood, a London-based economist at Capital Economics, founded by former adviser to the U.K. Treasury Roger Bootle, wrote in a note to clients. “A sustained, strong pick-up in spending still looks unlikely,” she wrote, because the economy is still in recession.

The pound will “struggle to gain momentum,” Friend said, predicting it will fall to 81 pence per euro in the next few months. Sterling will end the year about 0.8 percent weaker at 79 pence per euro, according to the median estimate of analyst forecasts complied by Bloomberg.
The Bank of England, which left its bond-purchase, or quantitative-easing, target at 375 billion pounds on Aug. 2, last week said the outlook is “unusually uncertain.” It predicted annual gross domestic product expansion of about 2 percent in two years, compared with a projection in May of 2.5 percent.
U.K. bonds have returned 2.7 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. They outperformed German bunds, which earned 2.5 percent and U.S. Treasuries, which rose 1.3 percent, the indexes show.


To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net