Shock Decline in December UK Retail Sales

Shock Decline in December UK Retail Sales

British Pound Falls as Shock Decline in December Retail Sales Raises Economic Concerns

The British Pound weakened against the Euro, Dollar, and other currencies following the release of disappointing retail sales data for December by the Office for National Statistics (ONS). The Pound to Euro exchange rate dropped from 1.1872 to 1.1842, while the Pound to Dollar exchange rate fell from 1.2215 to 1.2185.

Retail sales declined by 0.3% in December, contrary to market expectations of a 0.4% increase, a significant setback during what is typically a critical month for the UK’s retail sector. Year-over-year growth in sales reached just 3.6%, well below the anticipated 4.2%. The primary driver of the decline was a 1.9% drop in food store sales, which pushed the sector to its lowest point since April 2013.

This unexpected slump underscores the challenges facing UK consumers, signalling risks to economic growth in the coming months. Broader economic pressures have intensified since the Labour Party's election victory in July, with policy changes such as tax hikes, minimum wage increases, and added regulatory burdens contributing to a decline in business sentiment and consumer activity.

Retailers are struggling to absorb rising costs, particularly as National Insurance tax rates and thresholds are set to increase in April alongside a second consecutive year of above-inflation minimum wage hikes. These pressures are especially acute in the retail sector, which is a significant employer of minimum-wage workers.

The broader economic outlook remains subdued. Economic growth for November was just 0.1% month-on-month, missing expectations, while inflation in December came in slightly below forecasts. The slowing retail activity adds to evidence of weakened demand, likely reinforcing the Bank of England's confidence in managing inflation.

Market sentiment now suggests an almost certain interest rate cut by the Bank of England in February, with the possibility of three additional cuts throughout the year. Analysts caution that the Pound’s decline in 2025 reflects the compounded impact of these economic and fiscal challenges, as the UK continues to navigate a period of adjustment and uncertainty.

EUR/USD Fluctuates Amid Mixed US Data and Fed Signals

The EUR/USD pair experienced notable volatility in yesterday’s trading session as investors digested a mix of US economic data and commentary from the Federal Reserve. After an early attempt to extend gains, the euro lost ground against the dollar, reflecting ongoing uncertainty in global markets. Despite the pullback, the pair remains poised to achieve its first positive weekly performance in seven weeks.

The economic data presented a mixed picture. While jobless claims suggested potential softening, stronger figures from the retail sales control group and an impressive Philly Fed manufacturing report indicate signs of resilience. The manufacturing sector, in particular, appears to be rebounding, signalling a potential turning point in economic momentum.

Initially, both US Treasury yields and the dollar were on the rise. However, dovish remarks from Federal Reserve Governor Waller shifted the narrative. He suggested the possibility of rate cuts in the first half of 2025 and actively encouraged markets to consider this scenario. In response, the dollar weakened broadly, and Treasury yields fell by 3-5 basis points across the curve as investors unwound short positions.

Market sentiment also adjusted in anticipation of political shifts, including expectations surrounding Trump’s return, further contributing to the greenback's decline. These developments underscore the delicate balance of economic and political factors influencing currency markets.

Please note:  The news and information contained on this site should not be interpreted as advice or as a solicitation to offer to convert any currency or as a recommendation to trade.

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