UK Retail Sales Rises 0.2% in November; GBP/USD Holds onto $1.25

UK Retail Sales Steadies, But Challenges Loom

UK shoppers gave the Bank of England more to consider on Friday amid rising wages and spiking inflation. Here’s what the data reveals and its potential impact on the pound.

November Retail Sales: Modest Uptick Amid Inflation Pressures

On Friday, December 20, the UK Retail Sales Report garnered interest amid shifting sentiment toward a Q1 2025 Bank of England rate cut.

Retail sales increased by 0.2% in November after falling 0.7% in October. Economists expected a 0.5% rise. The modest upswing in spending came despite elevated inflation and interest rates. Nevertheless, the pickup in retail sales could be temporary. As the UK budget takes effect, wages, employment, and prices may come under further strain.

According to the Office for National Statistics,

• Other Non-food store sales increased by 2.5% in November, while Food Store sales rose by 0.5%.
• Household Goods Store sales also contributed to the total, advancing by 1.1%.
• However, Textile Clothing & Footwear Store sales tumbled by 2.6%, while Department Store sales declined by 0.9%.
• Automotive fuel sales dropped by 0.7%.
• Retail sales volumes increased by 0.3% in the three months to November 2024, compared to the three months to August 2024.

Bank of England Faces Inflation Dilemma

The modest rise in retail sales is unlikely to exacerbate demand-driven inflation or influence the timing of a BoE rate cut. On Thursday, the BoE kept interest rates at 4.75%, citing concerns about inflation becoming entrenched. The BoE’s outlook offered no light at the end of the tunnel for businesses and households.

BoE Governor Andrew Bailey commented on the uncertainty, stating:

“We think a gradual approach to future interest rate cuts remains right, but with the heightened uncertainty in the economy we can’t commit to when or by how much we will cut rates in the coming year.”

The UK annual inflation rate climbed from 2.3% in October to 2.6% in November, moving further from the BoE’s 2% target.

The BoE revised its growth forecast for Q4 2024 from 0.3% to zero on Thursday. Combined with sticky inflation, the revision underscored the risk of stagflation.

Adding to the pressure, the BoE’s Decision Maker Panel Survey for Q4 2024 revealed that businesses plan to cut jobs and raise prices in response to the UK budget. This points to an increasingly grim labor market and inflation outlook, which may impact private consumption in the near term.

GBP/USD Reaction to the UK Retail Sales Report

Ahead of the UK retail sales data release, the GBP/USD touched a pre-report high of $1.25075 before falling to a low of $1.24746.

Following the UK retail sales data release, the GBP/USD briefly dropped to a low of $1.24990 before rising to a high of $1.25088.

On Friday, December 20, the GBP/USD was up 0.04% to $1.25061. The muted response suggests that traders remain focused on broader economic concerns, including inflation and labor market risks.

Experts Insights

James Smith, Research Director at the Resolution Foundation, emphasized the BoE’s balancing act, saying,

“Here it’s clear that the 3 members (incl 1 internal) voting for rate cuts are worried about the extent to which the economy is slowing and the labor market is cooling. For me, this is a key concern with the real economy seemingly slowing sharply in the second half of the year.”

The outlook remains challenging, with rising inflation, job cuts, and budget pressures painting a grim picture for UK households and businesses.