GBP/USD crawls back as retail sales and UK public debt cross key milestone

The GBP/USD pair rose slightly in morning hours after data from the UK showed that the country is recovering. The pair is trading at 1.2440, which is 40 pips above yesterday’s low of 1.2400. The British pound index is trading at 124.20, which is slightly higher than yesterday’s low of 124.00.

Talk of negative rates dampen mood

The GBP/USD pair dropped sharply yesterday after the BOE interest rate decision. In the statement, the bank left interest rates unchanged at 0.10% and expanded the asset purchases program by £100 billion. All this was in line with what analysts were expecting.

The pair dropped during the press conference by Andrew Bailey. In his statement, the governor said that the bank was considering negative interest rates as part of its coronavirus response. Negative rates are seen as a move of last resort because it would hurt many banks in the UK. In theory, it would let banks charge people for their deposits to incentivise them to spend.

The announcement by Bailey came a day after the ONS released weak UK inflation data. The numbers showed that consumer prices dropped to at the fastest pace in four years because of the lockdown.

UK retail sales jump

There are signs that the economy is bouncing back. Three weeks ago, data from the UK showed that manufacturing and services PMIdata bounced back in May. And today, data from the ONS showed that retail sales bounced back in May.

The headline retail sales rose by 12.0% in May after falling by 18% in April. The sales were nonetheless 13% lower than in May 2019, which is understandable because the country was not in lockdown. The core retail sales, which exclude volatile food and energy prices rose by 10.2% after dropping by 15% in the previous month.

According to ONS, this growth was mostly driven by non-store retailing and online sales. Non-store retailing rose by 24% while online shopping reached its highest level on record. The only laggard were food stores.

This growth was mostly expected since the country has started to reopen. Indeed, on Wednesday this week, online clothing retailer Boohoo, announced that its sales in the quarter to May jumped by 45%. Other online retailers have announced a sharp jump in revenue also.

GBP/USD reacts to UK debt

In May something unique happened according to the latest numbers. Data on public borrowing showed that the UK’s budget deficit rose in May, pushing the debt to GDP ratio above 100% for the first time in 57 years.

The government borrowed a record £55.2 billion in May. This was higher than the April’s borrowing of £47.77 billion and the consensus estimates of £47.30 billion. As a result, the total borrowing since the financial year started in April has been £103.7 billion.

The reason for the jump is that Chancellor Rishi Sunak has recently launched unprecedented measures to cushion the UK economy. For example, the government is paying 80% of wages for about 12 million workers.

Analysts believe that the UK will need to recover faster for it to be in good financial standing. For example, according to the IFS:

“A slow recovery could mean borrowing could be as much as 70 billion pounds more in the 2024-25 fiscal year then was predicted in March.”

These numbers came a few months after Fitch downgraded the country to AA- and maintained a negative outlook. In its statement, the agency said:

“The Negative Outlook reflects our view that reversing the deterioration in the fiscal metrics beyond 2020 will not be a political priority for the UK government. Moreover, uncertainty around the future trade relationship with the EU could constrain the strength of the post-crisis economic recovery.”

GBP/USD technical outlook

On the daily chart shows that the GBP/USD pair is trading at the 50% Fibonacci retracement level. The price is also below the 50-day and 100-day exponential moving averages. Also, it has formed a head and shoulders pattern. This means that the price will likely continue falling as traders wait for more progress on Brexit. Remember, the deadline for either side to request an extension is on June 30^th.