Another tell of two tales once again for UK data
The retail sales report was poor (if you compare it to estimates) and that is what the market reacted on. And from headlines alone, it is no doubt the right reaction. Sterling moved lower, with cable breaching below the 1.3000 handle falling to a low of 1.2983. EUR/GBP rose to a high of 0.8940 on the back of that as well.
After having experienced a bad taste following yesterday's inflation report, you can't blame traders for dismissing this report on first glance as another poor one. As I mentioned plenty of times, trading is all about expectations.
If majority is expecting a 2 but a 1 comes out instead and those expecting a -1 but a 0 comes out, at times 0 is more than 1. It doesn't have to make logical sense, it just has to make some sense and that's enough for market participants to buy into. It's all about expectations.
However, given the context of the quarter and annual growth, the retail sales report earlier capped off a strong Q2 for the UK (best retail sales growth since Q1 2004) and on an annual growth basis it is the strongest since Q4 2016.
In light of that sort of sentiment, it is no surprise why we're not seeing any pullback in the short-sterling market. The rates market is basically unchanged and rightfully so. The sort of details the report provides will only give more reason (or at the very least not take away any) for the BOE to act in August instead.
While the currencies market see it as a time to sell, it's not exactly bad news in light of the details. Technically, the break of the 1.3000 handle is key but the question now is whether or not sellers can hold below it. Fundamentals may argue for a retracement of the drop (since the report isn't all bad), but you have to piece it together with the technical story to make sense of which direction things should go regardless.
