GBP/USD dips as Retail Sales slide

• UK Retail Sales slide 3.2% in December.

• GBP/USD edges lower.

The British pound has weakened slightly on Friday. In the European session, GBP/USD is trading at 1.2682, down 0.18%.

UK Retail Sales take a tumble

The markets were expecting a letdown from December retail sales after a strong November reading, but nobody was expecting a multi-year drop. Yet that’s what happened, as retail sales plunged 3.2% m/m, the lowest level since January 2021. Considering the sharp drop, the British pound’s reaction has been muted.

In November, retail sales jumped a revised 1.4%, as shoppers flocked to department stores to take advantage of Black Friday sales and other discounts. This meant that much of the Christmas shopping took place in November. The massive drop of 3.2% crushed the consensus estimate of -0.5%.

There is more to this story than Black Friday sales. The weak December reading reflected a UK consumer who is pessimistic about the economy and is being relentlessly squeezed by high inflation and elevated borrowing costs. December retail sales were brutal but the struggles faced by consumers are nothing new – retail sales fell by 2.8% in 2023, the lowest level since 2018.

The sharp drop in retail sales will have a negative impact on December GDP, which could mean that GDP for the fourth quarter is negative. If that is the case, the UK will technically be in a recession, with two consecutive quarters of negative growth. Even if the UK manages to avoid a recession, growth will be flat.

The Bank of England has kept rates unchanged for three straight times and meets on February 1. The sharp drop in retail sales supports the BoE considering a rate cut, but December inflation rose unexpectedly from 3.9% to 4.0%, and the BoE will be hesitant to chop rates before inflation is closer to the 2% target.

GBP/USD technical

• GBP/USD is testing support at 1.2689. Next, there is support at 1.2625.

• There is resistance at 1.2738 and 1.2802.