More Gloom for the Pound After Retail Sales Underwhelm

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The British Pound hit its lowest level against the Dollar since May after UK retail sales added to the losses that followed Thursday's Bank of England decision.

New data from the ONS shows the UK consumer remains cautious and retail businesses are under pressure, providing fresh evidence the economy has entered a downturn.

Retail sales recovered from -0.7% month-on-month in October to record growth of 0.2% m/m in November; however, the figure disappointed market expectations (0.5%).

The Pound to Euro (GBP/EUR) exchange rate fell 0.60% on Thursday and is slightly softer following the retail numbers at 1.2049 on Friday. The Pound to Dollar (GBP/USD) exchange rate this morning hit its lowest level since May at 1.2474.

On an annual basis, retail sales fell from 2.0% year-on-year in October to 0.5% in November, which is less than the consensus expectation of 0.8%.

Retail sales are a major driver of the UK's service sector-based economy and signal how demand and sentiment is evolving. Therefore, the undershoot in the numbers offers yet another disappointment and confirms the economy has lost significant momentum into year-end.

In fact, the Bank of England said on Thursday it had slashed its growth forecast for the final quarter of 2024 from 0.3% to 0%.

"The pound sold off on the back of the announcement," says Dean Turner, Economist at UBS AG. "While there may be further adjustment, it is hard to see that the pound will make much ground in the short term."

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Sensing a slowdown, three members of the Bank's nine-strong Monetary Policy Committee voted to cut interest rates. This surprised the Bank and suggests that it thinks it will need to cut interest rates further in the coming months to support a struggling economy.

These members can now point to the soft retail sales data as evidence of weak demand, potentially limiting fears of another spike in inflation.

"The UK consumer appears to be limping towards the finish line in 2024 - retail sales volumes came in slightly below expectations in November, with a good performance from food the only real highlight," says Charlie Huggins, Manager of the Quality Shares Portfolio at Wealth Club.

"The Autumn Budget leaves UK retailers between a rock and a hard place. The significant increase to national insurance contributions and the National Living Wage means they will have little option but to put up prices, and margins across the sector are likely to come under pressure," he adds.