In recent weeks, the sentiment for the cable has turned positive. This is attributed to the recent developments on Brexit which has been supported by strong economic data. Three weeks ago, a war of words between Theresa May and Michael Breiner emerged, threatening a no-Brexit deal. In a statement, the chief EU Brexit negotiator said that he disagreed with Theresa May’s Chequers agreement. This prompted a sharp rebuttal by May, who wrote an opinion in a newspaper reiterating that she would only support a Brexit deal that was in the interest of her country.
A week after these attacks, Germany and UK made concessions. This was followed by the release of transcripts of a testimony by Brainer. In the transcript, he said that the EU was ready to make concessions to avoid a no-Brexit deal. All these developments have brought optimism to a market that was afraid of a no-Brexit deal.
However, there is still a long way to go. Most importantly, there is a general fear among traders and the EU that the deal agreed will not receive majority support in UK’s parliament. Already, members of Theresa May’s party are up in arms about her deal. Just last week, a team of more than 50 legislators met to deliberate about impeaching Theresa May.
Apart from the Brexit talks, the country has been receiving positive data. Yesterday, the ONS reported that inflation in August rose at a faster rate than had been expected. On an annualized basis, the headline CPI rose by 2.7%, which was better than the expected 2.4%. On a monthly basis, the core CPI rose by 2.1%, which was higher than the expected 1.8%. Most of the inflation came from the volatile energy and food prices.
Today, we will receive the retail sales, which too are important measures of inflation and wage growth. Traders expect the data to show that the retail sales rose by 2.3%, which will be lower than the 3.5% reported a month ago. On a MoM basis, the retail sales data is expected to slow to minus 0.1%. The core retail sales which excludes energy and food prices is expected to rise at 2.5%, which will be lower than last month’s 3.5%.
Better than expected retail sales will be bullish for the sterling. In the past BOE meeting, the officials said that they will not likely have another rate hike ahead of Brexit. However, better than expected data will likely lead to a speculation of more rate hikes in 2019.