Disappointing UK Retail Sales Figures Don?t Stop Pound To Euro Exchange Rate Rising

Modified: Thursday, 20 September 2012 15:33 BST - Written by Ben Hughes

STORY LINK Disappointing UK Retail Sales Figures Don?t Stop Pound To Euro Exchange Rate Rising

This morning’s much anticipated Spanish bond auction sent out mixed messages to market participants regarding the state of Spain’s finances. The latest bond sale by the debt-ridden Iberian state saw some €4.8bn worth of medium-to-long-term bills shifted – a significantly greater tranche than policy-makers in Madrid had expected. The fact that the gilts were sold at lower average yields than previous recent offerings provided further cause for encouragement regarding Spain’s troubled fiduciary position.

However, the bond market as a whole remained unconvinced by the sale –debt yields on Spanish 10-year bills were sitting just below the 6% level in the lead-up to today’s auction and they remained at these levels in the aftermath of the auction. This suggests that bond market investors are more worried about the historical level of debt built up by Spain rather than by her near-term ability to raise funds. It would take innumerable debt auctions like today’s for Madrid to clear its mammoth national debt – more than the nation could ever hope to stage. The most realistic way for Spain to pay off its massive national overdraft would be to greatly increase the tax revenues which it accrues by getting its massed ranks of unemployed workers back into gainful employment. With unemployment rates running at 25% of the adult population, a turnaround in the labour market would appear to be a long way off. Whilst countries including Spain, Italy, Greece and Portugal continue to flounder, the euro is likely to remain out of favour in the currency markets. Today acted as a nudge in the ribs to this effect, causing a broad sell off of the single currency which sent the GBP EUR exchange rate as high as 1.2519 earlier.

The Pound would surely have made up further ground against the euro on the day had it not been for this morning’s release of mildly disappointing UK Retail Sales data for August. The numbers showed an annualised increase of 3.1% versus July’s figure of 3.3%. In tandem with yesterday’s Bank of England minutes, which suggested that more QE is on the way for the UK economy, the weak shop sales number has the potential to hurt the Pound in the short-to-medium term.

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