Will retail sales weigh on British pound?

The British pound is almost unchanged on Thursday, trading at 1.2342 in the European session.

Markets brace for another decline in retail sales

All eyes will be on the UK’s December retail sales, which will be released on Friday. The UK consumer has been holding tight to the purse strings, which is bad news for an economy that has tipped into recession. Headline retail sales is expected to decline by -4.1%, after a -5.9% read in November, and the core rate is projected at -4.4%, following -5.9% in November. A weak release will put pressure on the pound, which has looked sharp this week with gains of 1.07%. Consumer confidence has been in deep-freeze, which is not a surprise given the cost-of-living crisis that continues to squeeze consumers. GfK Consumer Sentiment is expected at -40, little changed from the previous reading of -42 points.

UK inflation dropped for a second straight month in December, falling from 10.7% to 10.5%. This is a welcome trend, but double-digit inflation is nothing to cheer about. As well, core inflation, which is a more accurate gauge, remained steady at 6.3%. The Bank of England has the unenviable task of having to continue to raise rates in order to curb inflation, despite the weak economy. The BoE holds its next meeting on February 2^nd and the markets have priced in a second-straight 50-bp increase, which would bring the cash rate to 4.0%. Unless inflation takes a dramatic plunge, we can expect further rate hikes after the February meeting.

The US dollar seems to lose ground whenever the US releases soft data, as we have seen this week. The Empire State Manufacturing Index sank to -32.9, while headline and core retail sales both fell by -1.1%. PPI came in at -0.5%. All three releases were weaker than the November readings and missed the forecasts, indicating that cracks are appearing across the US economy, which is feeling the bite of the Fed’s aggressive tightening.

The Fed continues to insist that high rates are here to stay for a while, but the markets are clinging to the belief that weak data will force the Fed to end the current rate cycle after a 25-bp increase in February and even cut rates late in the year. I expect this pattern to continue and for the US dollar to lose ground if economic releases continue to miss their forecasts.

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GBP/USD Technical

• 1.2352 is a weak resistance line, followed by 1.2455
• There is support at 1.2255 and 1.2179

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