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Sterling is under pressure due to weaker UK retail sales data

by SuperiorInvest


  • The British pound is falling sharply as UK retail sales fell sharply in December.
  • The deepening crisis in the cost of living has forced households to cut back on spending even during the holidays.
  • The BoE may continue to reiterate the need for higher interest rates.

The pound sterling (GBP) is falling sharply as the UK’s Office for National Statistics (ONS) reports negative retail sales data for December. UK household spending fell sharply as individuals faced the heavy burden of higher interest rates and consumer price inflation that exacerbated the cost of living crisis. A sharp fall in high street sales would have been expected to ease pressure on the outlook for stubbornly high inflation, but ultimately it was not enough to move the needle.

A sharp drop in retail sales may have increased the likelihood of an early rate cut by the Bank of England (BoE). However, despite a sharp drop in UK consumer spending, BoE policymakers are expected to keep monetary policy tight Monetary Policy until they are confident that core inflation will return to the 2% target in a timely and sustainable manner.

Going forward, market participants will focus on the preliminary S&P Global PMI data for January, which will be released next week. The UK Manufacturing PMI has been contracting for over a year now and is expected to continue on the back foot.

Daily Digest Market Movers: Sterling falls sharply on dismal UK consumer spending data

  • Sterling is facing an intense sell-off as the ONS reports a sharp fall in retail sales figures for December.
  • Retail sales excluding fuel prices fell sharply by 3.3%, versus expectations for a 0.6% decline. Economic data rose 1.5% in November. On an annual basis, consumer spending (excluding fuel) surprisingly fell by 2.1% y-o-y. consensus for a 1.3% increase.
  • Monthly retail sales fell sharply by 3.2% after a 1.4% rise in November. Investors had expected a slower decline of 0.5%. Consumer spending surprisingly fell 2.4% year-on-year, while investors expected a 1.1% rise. In November, economic data was slightly increased by 0.2%.
  • Weaker retail sales data is expected to ease the sticky inflation outlook.
  • This is expected to provide temporary relief to Bank of England (BoE) policymakers, who were concerned about pro-inflationary risks to price pressures after the release of stubbornly higher inflation data for December.
  • However, stress from deepening recession fears due to a vulnerable economic outlook will keep BoE policymakers on their toes.
  • It would be a balancing act for BoE policymakers to decide whether to turn dovish to protect the economy from recession or maintain a tight monetary policy to reduce inflation to 2%.
  • Meanwhile, investment banking firm Goldman Sachs expects the BoE to start cutting interest rates from August this year. The brokerage now expects interest rates to be cut by 75 basis points (bps) by the end of 2024.
  • Market sentiment is calm due to the absence of leading US economic indicators. Meanwhile, market participants will focus on a speech by San Francisco’s Mary Daly.
  • Fed Daly is expected to issue hawkish interest rate guidance until policymakers are convinced inflation will return to 2% in time.
  • Atlanta Federal Reserve Bank President Raphael Bostic said on Thursday that rate cuts should only be made if the central bank gets evidence that inflation will return to the 2% target on a sustainable basis.
  • Bostic warned that an early rate cut could add to price pressures and undermine existing efforts to contain higher inflation.

Technical Analysis: Sterling faces pressure near 1.2700

Sterling is falling sharply after facing selling pressure near the round resistance of 1.2700. Short term challenge for GBP/USD the pair is no longer bullish as it fails to climb above the 20-day exponential moving average (EMA), which is trading around 1.2690. While the 50-day EMA continues to provide support for sterling bulls.

The 14-time Relative Strength Index (RSI) is trading in the 40.00-60.00 range, suggesting consolidation ahead in the absence of a potential economic trigger.

Frequently asked questions about the pound sterling

The pound sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded foreign exchange (FX) unit in the world, accounting for 12% of all transactions, averaging $630 billion per day, according to 2022 data.
Its key trading pairs are GBP/USD aka “Cable” which accounts for 11% of FX, GBP/JPY or “Dragon” as traders know it (3%) and EUR/GBP (2%). . The pound sterling is issued by the Bank of England (BoE).

The single most important factor affecting the value of the pound sterling is the monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary objective of “price stability” – a stable rate of inflation around 2%. Its primary tool to achieve this goal is the adjustment of interest rates.
When inflation is too high, the BoE will try to keep it in check by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for the GBP as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation drops too low, it is a sign of slowing economic growth. In this scenario, the BoE will consider cutting interest rates to make credit cheaper so businesses borrow more to invest in growth-creating projects.

The data released assesses the health of the economy and can affect the value of the pound sterling. Indicators such as GDP, manufacturing and services PMI and employment can influence the direction of the GBP.
A strong economy is good for Sterling. Not only will this attract more foreign investment, but it may encourage the BoE to raise interest rates, which will directly strengthen the GBP. Otherwise, if the economic data is weak, the pound sterling is likely to fall.

Another important data release for the pound sterling is the trade balance. This indicator measures the difference between what a country earns on exports and what it spends on imports for a given period.
If a country produces a highly sought-after export, its currency will benefit purely from the extraordinary demand created by foreign buyers looking to buy those goods. Therefore, a positive net trade balance strengthens the currency and vice versa a negative balance.

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