Decline in UK Retail Sales Leads to Pound Depreciation Against the Dollar

On a disappointing Friday for the UK economy, retail sales exhibited a significant downfall, dropping by 3.2% in December, which surpassed the bleak expectations set by market analysts. The British pound responded to this downturn with a moderate decrease in value. Trading during the European session saw the GBP/USD pair at 1.2682, representing a 0.18% fall from its previous position.

Unexpected Drop in Consumer Spending

Despite the anticipation for a decline in December's retail figures, following a robust November performance, the scale of the drop caught observers by surprise. Retail sales reached a low not seen since January 2021, plummeting 3.2% month-on-month, a sharp contrast to the forecasted 0.5% decrease. The cliff-like drop came after November's revised figures showed a 1.4% increase, buoyed by early Christmas shopping and discount events such as Black Friday.

The Greater Economic Picture

This downturn is not just about temporary sales events; it also reflects the broader sentiment of UK consumers facing economic headwinds. High inflation rates and rising borrowing costs are pressing on the public, culminating in a woeful year for retail sales, which saw a 2.8% decrease over 2023, the worst in five years.

The severe decline in December's retail sales hints towards a potential contraction in the GDP for the final quarter, raising concerns about an imminent recession defined by two successive quarters of negative growth. The situation is tenuous, with a flat growth trajectory being the best-case scenario absent a recession.

The Bank of England, which has held interest rates steady in its last three meetings, will reconvene on February 1. The troubling retail data may support a rate cut; however, inflation's unexpected uptick to 4.0% in December complicates the matter, as reducing rates could stoke the inflationary fires further from the Bank's 2% target.

GBP/USD Exchange Rate Technicals

The GBP/USD pair is currently testing the support level at 1.2689. Should this level fail to hold, the next support lies at 1.2625. On the upside, the resistance levels to watch are at 1.2738 followed by 1.2802.

GBP, USD, Retail