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GBP/USD Exchange Rate Relinquishes Early Gains as UK Retail Sales Plummet

January 19, 2018 - Written by

After making some strong gains at the start of this morning’s session the Pound US Dollar (GBP/USD) exchange rate has found itself forced to retreat in the wake of some disappointing UK retail sales figures.

Pound (GBP) Gains Trimmed as Domestic Retail Sales Nosedive

Sterling’s advance against the US Dollar was brought to an abrupt halt this morning as the UK’s latest retail sales figures came in much lower than expected.

According to figures published by the Office for National Statistics (ONS) UK retail sales contracted by -1.5% in December, down from 1.1% growth in November.

The drop was well below expectations of a more modest decline to -0.6% and was the largest contraction since June 2016.

The large contraction was largely blamed on a shift in shopping habits as the increased proclivity for retailers to offer sharp discounts in November as part of Black Friday saw the majority of consumers make their Christmas purchases a little earlier.

However analysts were also keen to stress that the continued pay squeeze facing UK families also caused some families to cut back last Christmas.

Ben Brettell, senior economist at Hargreaves Lansdown, said;

‘We’ve been waiting for the pay squeeze to filter through to the high street, but so far retail sales have held up better than many expected. Today’s retail sales data from the ONS disappointed, however, with consumers cutting back on Christmas spending after November’s Black Friday splurge. This continues the trend of bringing Christmas spending forward to take advantage of early discounts.’

‘The big question now is whether this is the start of a worrying trend for the economy, or whether falling inflation and rising wages will come to the rescue.’

Despite the sharp decline last month the ONS reported that retail sales still showed growth in the last quarter thanks to the splurge in November.

However the overall reading for 2017 proved to be a little gloomier as the ONS also reported that sales growth last year was at its lowest levels since 2013.

US Dollar (USD) Dented by Government Shutdown Concerns

Meanwhile the US Dollar is struggling to capitalise on the fall back in the Pound this morning as it continues to suffer as the hands of cautious currency traders.

The US Dollar has ended every week lower against its major trading partners such as Sterling and the Euro (EUR) so far in 2018 as markets become increasingly sensitive to downside risks facing USD.

The current weakness in the US Dollar is being mainly driven by concerns over a possible US government shutdown as lawmakers struggle to hammer out a federal budget that will be accepted by Congress.

Despite a temporary budget being passed by the US House of Representatives on Thursday evening the bill was delayed in the Senate as bitter disagreements prevented progress from being made.

Observers are hopeful that a bill will eventually manage to pass later today, but the possibility remains that the Government could shutdown at midnight tonight, likely keeping the US Dollar subdued for much of the day.

Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo said;

‘There is a good chance the negotiations will take place until the last minute and keep the dollar on the defensive. That said, both the Republicans and Democrats want to avert a shutdown, especially with the U.S. midterm elections looming.’

GBP/USD Exchange Rate Forecast: US Consumer Sentiment to Rise?

Looking ahead the GBP/USD exchange rate may tumble later this afternoon as economists forecast that the US consumer sentiment index will have risen in January, although whether this will amount for much in the face of a possible government shutdown remains to be seen.

Meanwhile the focus for Sterling investors is likely to turn to next week’s employment figures will an expected drop in the UK Unemployment rate likely to lift the Pound on Wednesday.

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