UK Retail sales missed their mark, printing at -0.8% versus -0.1% eyed putting pressure on the pound in early London trade. The fall was the sharpest decline since April and raised the possibility that UK GDP may contract once again in Q4 of this year.

The fall in consumer spending was driven primarily by drop in sales of food, clothing and footwear. Headline volumes rose only 0.6% on a year over year basis suggesting that the overall trend is flat. Food sales which make up 41% of overall sales led the drop falling by 0.6% on the month.

Today’s weak Retail Sales data is the second disappointing economic reports this week, after jobless claims ticked up yesterday painting a bleak picture of the UK economy that was reaffirmed by Governor Mervyn King. He noted that UK may once again contract in Q4 of this year and today’s weak Retail Sales results confirm that view.

Cable fell to a session low of 1.5825 in the aftermath of the release, but recovered somewhat to stabilize at 1.5850. Still the pair remains under heavy selling pressure especially after yesterday’s comments by Governor King that UK would need to see a depreciating currency in order to improve its competitiveness. The pair may consolidate at these levels as it has now reached its 200 day moving average, but any further sell off in risk could prompt a test of 1.5800 as the day proceeds.

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