The Pound Sterling (GBP) continued its downward trajectory against most major currencies during Friday’s London trading session, driven by disappointing Retail Sales data from the United Kingdom (UK) Office for National Statistics (ONS).
The ONS report revealed a 1.2% contraction in monthly Retail Sales for June, significantly worse than the forecasted decline of 0.4% and a sharp reversal from the 2.9% growth recorded in May. Year-on-year, retail receipts fell by 0.2%, contrary to expectations of growth. The decline in sales was widespread, affecting all retailers except those selling automotive fuel.
This drop in Retail Sales, a key indicator of consumer spending, underscores the strain households are facing under the weight of higher interest rates imposed by the Bank of England (BoE). Despite these challenges, relief from interest rate pressures remains uncertain, with no clear direction on potential rate cuts by the BoE in August. The BoE’s hesitation is partly due to persistent inflation in the service sector and the sticky US core Consumer Price Index (CPI).
Compounding the situation, expected deceleration in Average Earnings data for the three months ending in May—a crucial gauge of wage growth influencing service inflation—has done little to boost expectations for BoE rate cuts. The current pace of wage growth remains higher than necessary to mitigate price pressures.
Market Movers: GBP Weakens, USD Strengthens
In market movements, the Pound Sterling fell to approximately 1.2930 against the US Dollar (USD), as the Greenback staged a robust recovery from a near four-month low. The US Dollar Index (DXY), which measures the Greenback’s strength against a basket of six major currencies, rebounded from 103.65 to nearly 104.30.
The US Dollar’s safe-haven appeal was bolstered by growing speculation that US President Joe Biden might withdraw from his re-election bid, introducing potential upside risks due to political uncertainty. However, this rebound may be short-lived, as market expectations suggest the Federal Reserve (Fed) is poised to cut interest rates in September. Investors anticipate two rate cuts this year, as indicated by recent Fed dot plots.
On Friday, New York Fed President John Williams and Atlanta Fed President Raphael Bostic are scheduled to speak. Their remarks will be closely watched for indications of the Fed’s timeline for interest rate reductions.
Fed officials’ optimism about inflation returning to the 2% target has been reinforced by slower-than-expected inflation growth and easing labor market conditions. Recent June CPI data showed a faster-than-anticipated deceleration in annual headline and core inflation, with monthly headline inflation declining for the first time in over four years.
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