What Are The Markets Facing?

Retail spending in the UK is anticipated to have contracted 2.6 percent during June, following a 3.5 percent gain during the month prior, which happened to be the largest rise since 1979. However, according to the Bank of England’s meeting minutes from July, the surprising rise in April was due to “good weather and difficulties adjusting for bank holidays.” In fact, the minutes revealed bearish sentiment as they said that “the low retail sales balance in the CBI Distributive Trades Survey, downbeat trading statements from large retailers, weak car sales, and the lowest consumer confidence balances since 1990 all painted a much weaker picture for consumption in Q2.” Furthermore, labor market conditions have started to deteriorate as jobless claims have risen during the past five months, suggesting that consumption growth may have peaked long ago. Overall, the economic scenario for the UK looks dour as the BOE meeting minutes also noted that "the outlook for growth in the rest of the year would most probably be weaker than the Committee had projected in May.” While UK CPI may be well above the BOE’s 2 percent target at 3.8 percent, substantial downside risks to growth leave the central bank little room for maneuver when it comes to monetary policy. If anything, the next change to the Bank Rate will likely be a cut, and if UK retail sales prove to be worse-than-expected, the markets will price in such a move sooner rather than later.

Bonds – Long Gilt Futures

Long Gilt futures have bounced from trendline support this week, but the upcoming release of UK retail sales could decide the contract’s next move. Indeed, if retail sales prove to be surprisingly strong, Gilts could fall back toward trendline support near 105. On the other hand, a drop in spending that matches or is worse than forecasts could propel Gilts higher to target 106.

FX – GBP/USD

GBP/USD continues to hold within a rising channel, but has failed in its most recent test of 2.0050. Upcoming event risk includes the release of UK retail sales, which are anticipated to show a decline in spending during the month of June. If the index falls in line with or more than expected, GBP/USD could drop for a test of trendline support near 1.9850, as it will raise the odds that the Bank of England will consider cutting interest rates within the next few months. On the other hand, a surprisingly strong reading like we saw last month could buoy the pair above the 200 SMA and possible lead the pair above 2.00 once again.

Equities – FTSE 100 Index

The FTSE 100 has surged over the past week and solid support has now developed near 5,300/50. However, the index could give up some of its recent gains on Thursday as UK retail sales are anticipated to fall negative, adding to evidence that the UK economy may be headed for recession. The news will likely be bearish for UK equities, as the country’s financial markets are already unstable and deteriorating economic conditions certainly will now help. As a result, the FTSE 100 may tumble toward 5,350. However, if the news is surprisingly strong, the FTSE 100 could continue to rally toward 5,560.

Terri Belkas is a Currency Strategist at FXCM.