Pound dips after soft retail sales

The British pound has edged lower in Friday trading. In the European session, GBP/USD is trading at 1.3558, down 0.28% on the day.

UK Retail Sales slide

UK retail sales had a dismal December. The headline reading fell -3.6% m/m, missing the consensus of -0.6% and sharply lower than the November gain of 1.0%. It was a similar story for core retail sales, as the -3.5% reading missed the consensus of -0.5% and followed a 0.7% gain in November. The sharp decline is not all that surprising, given that the Omicron variant spread rapidly across the UK in December. Consumers did much of their Christmas shopping in November and many people stayed at home due to Omicron. This may explain why the pound’s losses have been relatively light today following the soft retail sales report.

Inflation continues to rise in the UK and climbed to 5.4% in December, its highest level in 30 years. A key question is whether the BoE will respond with a rate hike at its next meeting on February 3^rd. The bank has proven to be unpredictable, catching the market completely off guard in the past two meetings. In November, the bank stood pat after strongly hinting at a rate hike, and last month the BoE raised rates by 15 bps when the markets had not expected a move. With inflation on the move, a strong case can be made for a rate hike, although policymakers may be reluctant to raise rates when the economy has still not emerged from the Omicron wave. The markets are betting that inflation and the squeeze on the cost of living will be enough to force the BoE to hike rates. A rate increase of 0.25% has been priced in at over 90%, making it a virtual certainty unless there is a dramatic negative development ahead of the meeting.

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GBP/USD Technical Analysis

• 1.3560 is under pressure in support. Below, there is support at 1.3438
• GBP/USD faces resistance at 1.3776 and 1.3870

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