Pound US Dollar Exchange Rate News: GBP/USD Slipped as UK Retail Sales Declined

January 20, 2023 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Slipped as UK Retail Sales Declined

Pound (GBP) Weakened amid Tumbling Retail Sales

The Pound (GBP) stuttered on Friday morning as retail sales printed far worse than expected. Against expectations of a 0.5% rebound from November’s poor figure, retail sales in December declined by 1.0% MoM.

Optimism surrounding the winter World Cup boosting sales were misguided as inflationary pressures forced consumers to cut back on their festive spending. Retail sales fell by 5.8% compared to December 2021, which signalled the greatest drop for any December on record. Olivia Cross, economist at Capital Economics, commented that the economy’s resilience had finally weakened in December. Cross added:

‘What's more, we think the bulk of the drag on activity from high inflation and rising interest rates has yet to be felt and will weigh more heavily on retail spending and the overall economy in 2023.’

Further concerning, is that retail sales volumes also tumbled, falling by 3% for the whole year. The slumping sales in the retail sector heralded the worst slump performance-wise since records began in 1997. Sales at non-food stores declined by 2.1% as consumers pulled back on their spending, and even food sales edged 0.3% lower.

More positively, however, is the news that lower gas prices could mean the Treasury could afford to scrap the proposed increase in energy bills in April. If such a move was to materialise, headline inflation could soften even further by 1-1.5pp by the end of the year. ING Economist James Smith, believe that household income squeeze might not be as bad as feared if Chancellor Jeremy Hunt scraps plans to increase the energy bill cap. However, there could be a caveat, Smith explained:

‘For the Bank of England that’s a double-edged sword – lower headline inflation would undoubtedly please the hawks most worried about inflation expectations de-anchoring. But lower gas prices mean a less pronounced hit to economic activity, potentially justifying tighter policy.’

US Dollar (USD) Capped by Upbeat Market Sentiment

Meanwhile, the US Dollar (USD) could be seeing its gains limited by an improving market mood amid a lack of economic data.

An upbeat market sentiment, bolstered by a hawkish European Central Bank (ECB) and the reopening of China, the safe-haven ‘Greenback’ could be capping their gains. Expectations of the Federal Reserve slowing their aggressive rate hike policy could also be playing on investors’ minds.

A tumble in jobless claims supported the US Dollar on Thursday, as a tight labour market gave at least some optimism towards the US economy. However, with the recent rhetoric shown by Fed policymakers, reduced rate hike best could be weighing on investors’ minds, preventing any further gains for the US Dollar.

GBP/USD Exchange Rate Forecast: Domestic Woes to Sink Sterling Further?

Looking ahead, the Pound US Dollar exchange rate could see the Pound slide further as a lack of economic data for the pairing could see them exposed to market sentiment. In the case of Sterling, the dire outlook for 2023 could continue to sap demand amid industrial strikes and the cost-of-living crisis hampering economic growth.

Meanwhile, the US Dollar could also be left to market sentiment heading into the weekend. A speech from Fed governor Christopher J Waller could influence proceedings if comments arise surrounding the Fed rate hike policy.

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TAGS: Pound Dollar Forecasts