GBP surges for now as markets follow UK data rather than Carney
It is no surprise that GBP has again rallied following the very strong July UK retail sales data (+1.1% mm vs consensus of +0.6%). This reading follows a spate of robust UK data readings. Markets have decided to follow the stronger UK data rather than the forward guidance initiated by Governor Carney last week. Accordingly, UK yields are higher since last Wednesday and GBPUSD has broken above key technical support in the form of the 200 day ma (1.5525) and the downward sloping trendline at 1.5522. We are wary about pursuing such GBP strength and believe that two factors will be key in directing GBP – whether Carney successfully delinks UK yields from the backup in US yields and how UK data releases perform. Looking purely at retail sales, much of the July strength is driven by food and drink due to the fine summer weather. There is a strong chance this strength is given back in the August data. We also maintain that the UK unemployment rate is not trending lower in the same fashion as that in the US and thus UK yields should not be following those in the US higher. Accordingly, GBP’s rally will be in danger of failing.
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BNP Paribas