Pound Sterling Shrugs Off Higher UK Retail Sales in October as Weaker Trend Weighs

A fall in spending at food stores was the largest contributor to the annual fall, which was itself aided by an unusually strong set of numbers back in October 2016.

The Pound drew only a muted boost from October's retail sales numbers Thursday as traders focused instead on the broader trend of faltering growth in UK consumer spending.

Office for National Statistics data showed UK retail sales rising by 0.3% between the end of September and October when economists had forecast a more meagre 0.1% rate of growth.

However, on the downside, retail sales slipped by -0.3% for the twelve months to the end of October, marking the first annual fall since March 2013.

A decline in spending at food stores was the largest contributor to the slide, itself aided by an unusually strong set of numbers back in October 2016, which made annual growth that bit harder to come by this time around.

“With real incomes under pressure from subdued nominal wage growth and rising inflation, it isn’t surprising that spending growth has lost further momentum,” says Ruth Gregory, a UK economist at Capital Economics.

The consensus among economists had forecast a larger -0.6% fall in the annual measure but, regardless, the significance of consumer spending to the economy and the recent loss of momentum on the high street meant traders were reluctant to reward the numbers with a stronger bid for Sterling.

“That said, there are reasons to think that sales growth won’t slow much further. For a start, with unusually warm weather hitting purchases of winter clothing ranges, there is scope for a rebound in clothing sales over the coming months now the weather has turned,” adds Gregory.

The Pound was quoted just 20 points higher against the Euro and Dollar a short time after the release, making for a Pound-to-Dollar rate of 1.3179 and a Pound-to-Euro rate of 1.1188. Both levels were seen by traders in the 12 hours leading up to the release.

“And with inflation likely to fall back next year – note that the retail sales deflator has already showed signs of falling back, ticking down from 3.3% in September to 3.1% – there should be scope for retail spending volumes to regain some momentum as the real pay squeeze eases,” Gregory concludes.

Thursday’s retail numbers come closely on the heels of labour market data for October and amid ongoing uncertainty over the stability of Prime Minister Theresa May’s government.

“September’s disappointing labour market figures saw employment fall by 14,000 in Q3, marking the first quarterly decline in 12 months, while annual employment growth slowed to 0.9%,” says Finn McLaughlin, another economist at Capital Economics.

Wednesday’s labour data showed momentum in UK jobs market appearing to wane. Although the number of unemployed continued to fall and the unemployment rate held steady for October, the size of the overall labour force shrank, by 14,000, for the first time since 2012.

Of particular significance, the pace of UK wage growth slowed during October, slipping +to 2.2% from 2.3% in the previous month.

“Given the strength of the hiring surveys, we suspect that this weakness will prove temporary,” McLaughlin adds.

Wage growth is significant for the Pound as without a pickup in ‘real wages’, which requires pay to grow in excess of the rate of inflation, the Bank of England could struggle to justify further interest rate rises.

The BoE raised rates for the first time in a decade earlier in November, adding 25 basis points to the bank rate, which now sits back at 0.50%.

The Pound was quoted lower against both the US Dollar and Euro during early trading Thursday, with the Pound-to-Euro rate marked down 0.13% at 1.1165 and the Pound-to-Dollar rate called 0.04% lower at 1.3168. 

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.