Sterling Jumps on Brexit Comments and Retail Sales Data

• Investors take tariffs in their stride, focused on White House response;

• GBP climbs on optimistic Brexit comments;

• Strong spending figures could weigh on data in Q4.

It’s been a positive start to trading in Europe on Thursday as investors continue to shrug off the latest tariffs from the US and China.

US futures are currently trading flat and failing to take much of a lead from across the pond. Investors are continuing to monitor the main political stories, which have been an important driver of risk appetite for much of the year, but the latest tariffs didn’t catch anyone off guard and so the impact has been marginal. Of far more interest to investors is what comes next with Trump having threatened to begin “phase three” if China responded with counter-tariffs, which they have.

The speed and aggression with which Trump responds will be interesting now, especially given China’s apparent willingness to forge closer relationships elsewhere as ties with the US become increasingly strained. The mid-terms in November may well be a defining moment for these negotiations as a big defeat for Republicans could force a change of strategy. I think Trump will want to avoid “phase three” if possible due to the impact on the consumer but he’s backed himself into a corner now, his response will be very interesting.

The pound is climbing again on Thursday, following some optimistic views on the prospect of a Brexit deal from the UK Cabinet Office Minister David Lidington and the release of stronger retail sales figures for August. With exit day fast approaching and clear divisions remaining, particularly on the Irish border, we seem to be getting a constant flow of commentary from a variety of officials on the progress of negotiations which is having a big impact on sterling.

The latest comments – in which Lidington claimed there is a 85-95% chance of getting a deal and that he believes it can be done by October – gave the pound a nice boost early in the European session. This is a perfect example of the kind of noise that’s impacting the markets at the moment despite not really offering anything of substance and giving any indication of whether talks are moving forward, which they don’t appear to be. But with the October and November meetings just around the corner, I don’t see this changing as traders try to get ahead of the curve.

The UK retail sales figures were arguably more interesting and while they did provide an additional lift – taking the pound back above 1.32 against the dollar – the impact was much smaller than with Lidington’s comments, which shows just how big an impact politics is having in markets right now compared to the data. Sales grew by 3.3% last month – 3.5% on a core basis – which easily exceeded expectations and included an upward revision to the July figure.

While I’m not convinced this momentum will continue into the end of the year, with the squeeze on real incomes more than likely to negatively impact spending after a bumper summer, it should provide a nice boost to third quarter growth. The question now is whether it will in turn act as a drag on the fourth quarter as consumers tighten the purse strings after a splurge during the sunny summer months.