Pound Sterling spiked lower against the Euro and US Dollar after the latest UK retail sales data, but the impact was offset to some extent by a rebound in equities.
The Pound to Euro (GBP/EUR) exchange rate dipped sharply to below 1.1650 before a recovery to 1.1660.
ING expects solid underlying Pound support around 1.1630.
According to the Office for National Statistics (ONS), UK retail sales volumes slumped 3.2% for December compared with expectations of a 0.5% increase and followed a revised 1.4% increase for November.
This was the sharpest monthly decline since January 2021.
There was an element of Christmas sales being pulled earlier to November which hurt December, although there was also evidence of underlying weakness.
In the three months to December sales declined 0.9% from the previous three months.
Sales declined 2.4% in the year to December after a 0.2% increase previously.
Non-food store sales declined 3.9% on the month with a 3.1% slide for food-store sales.
Sales volumes declined 2.8% in 2023 to the lowest level since 2018.
The sharp increase in prices remained a key element as sales volumes declined 4.8% since February 2020 while the value of sales has increased 13.9%.
Heather Bovill, deputy director for surveys and economic indicators at the ONS commented: “Food stores performed very poorly, with their steepest fall since May 2021 as early Christmas shopping led to slow December sales.”
She added; “The longer-term picture remains subdued, with quarterly sales dipping, while annual sales volumes fell for the second consecutive year, to their lowest level in five years.”
Following the data, the 2-year yield declined to 4.25% from 4.30% with a May Bank of England rate cut seen as back on the table.
According to Aled Patchett, head of retail and consumer goods at Lloyds Bank; “Retailers are at the forefront of the impacts caused by the cost of living pressures, which remains a barrier to increasing consumer spending. Our own data show that retail spend per customer in December 2023 flatlined compared to the previous year, but some subsectors like health and beauty grew.”
He added; “While we’ve unfortunately seen a rise in inflation this month food inflation has continued to come down, but until personal finances improve and confidence returns retailers will have to navigate a challenging trading environment.”
Capital Economics assistant economist Alex Kerr noted the increased recession risks; “Today’s release would subtract around 0.15 percentage points from real GDP growth in December, which increases the chances the economy may have ended 2023 in the mildest of mild recessions.”
He also noted the risk of a first-quarter spending decline, but added; “we think interest rate cuts from June and the further boost to real household incomes from falling inflation will support a recovery in real consumer spending in the second half of this year.”
ING expects an earlier recovery in sales; “The UK retail sector ended the year on a dramatic low. But with consumer confidence having recovered, real wage growth positive and the mortgage squeeze being dampened by the fall in market rates, we think December’s fall in retail sales will be reversed in the first quarter.”
MUFG put the data into perspective; “it does not alter the big picture significantly that the UK economy has been stagnating for just over a year now. For the BoE to become more confident that they can begin to lower rates to provide more support for growth in the UK, they will need to see further evidence that persistent inflation risks are diminishing.”
MUFG sees a potential May rate cut, but this could be delayed until August.
As far as the Euro-Zone is concerned, there are strong expectations that the ECB will cut interest rates in the second quarter of 2024, with a small minority expecting a March cut.
There will be an element of caution ahead of next week’s ECB policy meeting.