December Sees 3.2% Drop in UK Retail Sales, Prompting Recession Concerns

• UK retail sales experienced a 3.2% decline in December.
• Retail sales in 2023 recorded the lowest performance since 2018, heightening the risk of a recession in the UK.
• Up next, there will be releases on US consumer sentiment and speeches from the Federal Reserve.

UK Retail Sales Data

In December, UK retail sales experienced a 3.2% decline following a 1.4% increase in November, aligning with economists' forecast of a 0.5% drop.

Non-food store sales volumes took a substantial hit, dropping by 3.9% in December, reversing the 2.7% growth in November. Sales at food stores also suffered, declining by 3.1% after a 1.1% increase in November. Online retailers experienced a noticeable drop in sales, falling by 2.1% from a 1.1% decrease in November. Additionally, automotive fuel sales decreased by 1.9%, negating the 0.8% rise seen in November. The 2023 retail sales figures ended on a somber note, down by 2.8%, the lowest performance since 2018.

Bank of England Monetary Policy Implications

The recent UK Inflation Report might keep the Bank of England in a wait-and-see mode until inflationary pressures ease. Nevertheless, the concerning retail sales data could prompt discussions about potential rate cuts, as it reflects a concerning image of the UK economy, where private consumption constitutes over 60% of the GDP.

GBP/USD Reaction to UK Retail Sales

Preceding the report, GBP/USD reached a low of $1.26876 before climbing to $1.27145. Following the release of the retail sales figures, GBP/USD spiked to $1.26952 before retreating to $1.26679. By the end of Friday, GBP/USD experienced a 0.21% decrease, closing at $1.26786.  

190124 GBPUSD 3 Minute Chart

Upcoming Events: US Consumer Sentiment and Federal Reserve Speakers

On Friday, all eyes will be on the Michigan Consumer Sentiment Index, which is expected to attract significant investor attention. A potential increase in consumer confidence could signify a favorable trend in consumer spending, possibly leading to heightened demand-driven inflation.

Amid persistent inflation, the Federal Reserve might opt for an 'extended period of higher interest rates' strategy to mitigate consumer spending and alleviate inflationary pressures.

Economists anticipate the Michigan Consumer Sentiment Index to climb from 69.7 to 70.0 in January. While the headline figure is crucial, investors should also take into account sub-components such as inflation and employment.

Additionally, investors should pay attention to the scheduled speeches by FOMC members Michael Barr and Mary Daly, as their insights could provide valuable perspectives on the Fed's stance and future monetary policy.