- The British pound fell after news that UK retail sales fell almost 1% in September.
- The decline in retail sales suggests a weakening of household spending, which is the main driver of the British economy.
- The Bank of England is expected to keep interest rates unchanged.
The British Pound (GBP) retreated after the UK’s Office for National Statistics (ONS) reported weak retail sales data for September. British households have postponed their demand for basic goods as rising borrowing costs and persistent inflation have sapped their purchasing power. The GBP/USD pair has been exposed to further declines, as the decline in consumer spending indicates that global demand will remain vulnerable, forcing British companies to further reduce their operating capacity.
The consequences of a slowdown in retail demand would fall on producers and job seekers, as weak consumer spending could translate into lower production by companies and, consequently, lower demand for labor. For policymakers at the Bank of England (BoE), weak retail demand sharply reduces consumers’ inflation expectations and cools the economy. This would allow the BoE to extend the rate pause until the November policy meeting.
Daily Market Drivers Summary: Sterling Faces Sell-Off Following Weak Retail Sales Data
- The British pound fell back towards the support of the 1.2100 round level as UK retail sales contracted more than expected in September.
- Monthly retail sales, a key indicator of consumer spending, fell 0.9% versus expectations for a 0.1% decline. In August, retail sales rose 0.4%. In annual terms, sales contracted 1.0%, while economists expected stagnation.
- Retail sales, excluding fuel, also fell 1.0% and 1.2% monthly and year-on-year respectively.
- Weak retail sales suggest that high inflation and borrowing costs have put a significant squeeze on household pockets.
- The sharp decline in consumer spending is expected to dent consumers’ inflation expectations.
- Weakening spending could tip the Bank of England to keep interest rates unchanged at 5.25% on November 2.
- It would be a difficult decision for BoE policymakers, as September inflation data surprised by slightly exceeding expectations.
- Monthly headline inflation rose 0.5%, while investors expected a growth rate of 0.4%. The annual headline CPI grew at a steady 6.7%, above expectations of 6.5%.
- British inflation data for September indicated that the Bank of England has a long way to go to reduce inflation to 2%.
- The UK’s highest inflation among the G7 economies is giving more air to debates over raising the inflation target to 3%.
- According to the British think tank The Resolution Foundation, a higher inflation target would allow the central bank to reduce its borrowing and bond purchasing needs and would provide greater stimulus.
- The US dollar recovered some of its losses following the neutral guidance on interest rates offered on Thursday by Federal Reserve (Fed) Chairman Jerome Powell.
- Powell joined his colleagues in citing that the recent jump in US Treasury yields has significantly tightened overall financial conditions. However, the strength of the US economy and tense labor market conditions could justify further interest rate hikes.
- On Thursday, the U.S. Department of Labor reported the lowest weekly jobless claims in nine months. People filing for unemployment benefits for the first time in the week ending October 13 stood at 198,000, below expectations of 212,000 and the previous release of 211,000.
- Meanwhile, market sentiment remains bearish amid tensions in the Middle East. Western nations’ support for Israel has raised expectations of Iranian intervention in the Israel-Palestine conflict.
- After US President Joe Biden supported Israel against the Hamas group, British Prime Minister Rishi Sunak told Israel: “We want you to win.”
Technical Analysis: Sterling retreats towards 1.2100
Sterling falls sharply following weak retail sales data. The GBP/USD pair falls towards two-week lows below the round 1.2100 level. The broader outlook for the pair is vulnerable as it faced immense selling pressure while attempting to cross the 20-day exponential moving average (EMA) higher. Momentum oscillators have moved towards the bearish zone, justifying further declines. A new breakout could drag GBP/USD towards the psychological support of 1.2000.
Pound Sterling FAQ
What is the Pound Sterling?
The British Pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded currency unit in the world, with 12% of all transactions and an average of $630 billion per day, according to 2022 data.
Its key currency pairs are GBP/USD, also known as “Cable”, which represents 11% of the forex market, GBP/JPY, or the “Dragon” as it is known to traders (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
How do Bank of England decisions influence the Pound Sterling?
The most important factor influencing the value of the Pound Sterling is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on achieving its main objective of “price stability”, that is, a stable inflation rate of around 2%. Its main tool to achieve this is the adjustment of interest rates.
When inflation is too high, the Bank of England tries to contain it by raising interest rates, which makes access to credit more expensive for individuals and companies. This tends to be positive for the GBP, as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation is too low, it is a sign that economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to make credit cheaper, so that companies borrow more to invest in projects that generate growth.
How does economic data influence the value of the Pound?
The published data gauges the health of the economy and may influence the value of the Pound sterling. Indicators such as GDP, manufacturing and services PMIs, and employment can influence the direction of the Pound.
A strong economy is good for the British pound. Not only does it attract more foreign investment, but it may encourage the Bank of England to raise interest rates, which will directly strengthen the Pound. Otherwise, if economic data is weak, the pound is likely to fall.
How does the trade balance affect the Pound?
Another significant data for the pound sterling is the trade balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports during a given period.
If a country produces highly sought-after exports, its currency will benefit exclusively from the additional demand created by foreign buyers wishing to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
