21.08.202015:05 Forex Analysis & Reviews: Great Britain walks tightrope

UK retail sales for July were much higher than expected. As a result, the British pound jumped to a 1.5-month high against the euro.

Economists expected sales to remain unchanged. However, retail sales rose year-on-year compared to the previous month. Monthly indicators also exceeded expectations.

Derek Halpenny, the head of research at MUFG, claims that this is the only way to keep the pound afloat. Moreover, the weakening of the American currency may contribute to the strengthening of the British one. However, the expert believes that such an impressive growth should be feared.

The pound sterling rose by 0.3% to 89.46 against the euro. Last time this situation was observed in July. The pound also rose by 0.1% to $1.3225 against the US dollar. Now the pound has lost some gains amid the general strengthening of the US dollar.

The British pound exchange rate is influenced by several internal and external factors, such as the interest rate, inflation rates, data on GDP and economic activity, employment and unemployment rates, and the volume of national debt. Obviously, not everything is as good as we would like to see.

Moreover, Brexit negotiations still have no results. According to some information, the latest round of negotiations this week did not lead to a breakthrough on key issues. Great Britain and the European Union are far away from making a trade deal after Britain left the EU. In addition, British Prime Minister Boris Johnson fears that Northern Ireland and Scotland will want to secede from the country after Brexit. He ordered to provide assistance to the regions. The pound is sure to face problems in this case.

Moreover, the UK national debt has hit a record low. It has exceeded £2 trillion ($2.65 trillion) for the first time as the officials increased government spending to cope with the COVID-19.

The worst thing here is that the size of the national debt has already exceeded the size of the country's GDP. The budget deficit in July was £26.7 billion ($35 billion), while borrowings rose to £150.5 billion ($197.7 billion).

The UK economy contracted 20.4% in the second quarter of 2020 compared to the previous three months. The Bank of England predicts that GDP will fall by 14% this year, the worst point since 1706. The unemployment rate is also expected to rise from 4% to 9%.

A deep debt, serious deficits, and tensions with a major trading partner fuel fears among wealth managers and investors. As a result, Britain may lose investments in the country as traders would like to invest in other countries with more stable economies.