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Retail Sales From the UK, Italy and Monetary Policy Implications

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There is a general shift in the economic situation going on, particularly in Europe. But, the difference in monetary policy in response to a similar situation on either side of the English Channel could provide some interesting investment opportunities. We might see some fluctuations in EURUSD and, of course, GBPUSD.

The two main themes are a general shift in central banks towards tightening policy to deal with increased inflation. Meanwhile, governments move to lift the latest restrictions applied in the wake of the omicron case surge as infection numbers start to come off their highs.

The UK was one of the first countries to experience an omicron surge and was not surprisingly one of the first countries to pass the peak. However, the UK government had the most liberal of restrictions so far, mainly due to what most speculate are political reasons.

Moving the economy forward

Naturally, the sector of the economy most affected by omicron is retail. And so it’s been a key metric for gauging the recovery. They are also now coming under increased scrutiny due to supply chain issues. Stores have been stocking up on inventory in anticipation of increased sales.

However, if they don’t materialize, it can create a problem of too much inventory as supply chain issues resolve. Excess inventory is one of the underlying primary issues that cause a recession.

The BOE was among the quickest and most aggressive to raise rates recently. Specifically, at their last meeting, the dissent on raising rates was that they weren’t raised fast enough.

Some analysts are speculating that the sudden increase in capital costs combined with a loss of purchasing power from consumers could cause a rapid deceleration in the economy. One of the first places we could note that is if consumers are hesitant to keep buying.

What to look for in the data

It might be a bit too early to tell with the upcoming batch of data.

In the case of the UK, lifting the restrictions wasn’t announced until the end of the month. Up until that point, there was quite a lot of public speculation from officials that restrictions would need to increase because of omicron. This is likely to have depressed the retail situation. And we might have to wait until next month to see the economic impact of the end of restrictions.

Analysts expect the UK BRC Retail Sales Monitor to come in at -0.3% compared to 0.6% growth in December. That’s a tough comparison, as retail sales typically do better during Christmas trading, as well.

So, a negative number isn’t likely to impact markets all that much. But if the UK manages to have an increase in retail sales despite omicron, it might be positive.

Italy’s latest moves

We also have retail sales from Italy, which could have risen to 0.6% in December, compared to -0.4% in November.

Most recently, PM Draghi announced that a roadmap to lifting restrictions will be developed. And that the current restrictions would not affect vaccinated people. With 88% of the country vaccinated, the economic impact of the restrictions could be minor.

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