GBP is likely to face continued pressure against both the EUR and the USD, as recent data shows UK retail sales came in weaker than expected, and a significant drop in consumer confidence confirms the ongoing slowdown in the UK economy.
According to the Office for National Statistics (ONS), UK retail sales saw a 0.9% month-on-month decline in September, surpassing the market's anticipated -0.2% decrease and marking a sharp reversal from August's 0.4% growth. Year-on-year, retail sales for September are down by 1%, which is a slight improvement from August's -1.3% YoY figure but still falls short of the expected -0.1% contraction.
The initial reaction in the foreign exchange market was to sell GBP, reflecting investors' belief that the UK economy is poised to underperform both the U.S. and Eurozone economies. This data aligns with the notion that the Bank of England may maintain interest rates in November, potentially putting further downward pressure on GBP.
The GBP to EUR exchange rate is currently 0.86% lower, trading at 1.1455, and appears likely to break below its summer range, approaching levels not seen since May. The GBP to USD exchange rate is down by a quarter of a percent for the week, quoted at 1.2112.
The persistently high inflation in the UK is having a significant impact on consumer demand, leading to a steady decline in retail sales volumes since their peak in 2021. Despite declining sales volumes, the value of retail sales is still rising. Retailers have maintained their margins by increasing prices, but this has led to challenges in the sector's output.
Furthermore, the GfK consumer confidence survey for October showed a sharp decline, reflecting the increasing impact of the cost of living crisis and rising interest rates on consumers, which suggests a deteriorating economic outlook. The GfK Consumer Confidence Index dropped by nine points to -30 in October, with all five measures recording declines compared to the previous month.
According to Joe Staton, Client Strategy Director at GfK, "UK consumer confidence has fallen nine points this month to -30, taking us back to where we were in July this year. This sharp decline underscores the challenges posed by the cost-of-living crisis and the struggle to make ends meet."
GfK's survey indicates that "fierce headwinds" are affecting consumers as they grapple with heating costs, petrol prices, surging mortgage and rental rates, and a slowing job market. Uncertainties related to conflict in the Middle East are also contributing to this growing unease.
The outlook for retail sales remains bleak, as GfK's survey reveals a significant drop in its major purchase measure, down by 14 points, which is concerning for retailers as the holiday season approaches.
