Sterling slips despite retail recovery; focus on Brexit talks

LONDON: The pound slipped in early London trading on Friday and data pointing to a recovery in British retail sales did little to support it, as investors focused on the lack of progress in trade talks with the European Union.

Retail sales recovered to almost pre-lockdown measures in June, with sales volumes exceeding all forecasts in a Reuters poll of economists.

A survey measuring employers' confidence in hiring and investing also rose, turning positive for the first time since February.

But the pound remained subdued. It slipped slightly against a broadly weaker dollar and at $1.2731 was still well below its pre-coronavirus levels.

Versus the euro, the pound was down around 0.1%, at 91.155 pence. Sterling has fallen against the euro every day since Tuesday, after an agreement on a massive European stimulus plan saw the single currency surge to its highest since October 2018.

"In the past week, sterling has been somewhat caught in the middle between an appreciating euro and a depreciating dollar," UBS strategist Gaétan Peroux wrote in a note to clients.

"As attention moves from the EU Recovery Fund possibly toward the ongoing Brexit talks we see potential for sterling to rally on positive sentiment around those discussions," he said.

Speaking after this week's round of Brexit negotiations in London, the EU's chief Brexit negotiator, Michel Barnier, said that reaching a new trade deal was "unlikely" as the UK had shown no willingness to break the deadlock.

Implied volatility gauges for sterling with one-month maturities rose have been edging up since Tuesday, suggesting that investors are wary of volatile price action from Brexit-related headlines during the summer.

"Despite a lack of progress, market participants are still assuming a last minute trade deal will be reached later this year when the alternative is to impose another self-inflicted shock onto the UK and European economies which are still reeling from the unprecedented COVID-related disruption," Lee Hardman, currency analyst at MUFG, wrote in a note to clients.

Britain has the highest COVID-19 death toll in Europe, and Bank of England policymaker Jonathan Haskel warned on Thursday that the country's economic recovery from coronavirus would depend heavily on people not being too nervous to go out.

London-listed shares fell on Friday, hit by a batch of mixed quarterly earnings updates and worsening US-China relations sparking a risk-off mood.