British Pound Edges Lower on Soft Retail Sales Report

• UK retail sales post a sharp decline
• Rainy weather and high prices weighed on consumer spending

The British pound has given up ground on Friday after several days of modest gains. In the European session, is trading at 1.2736, down 0.07%.

UK retail sales decline more than expected

The weather in the UK continues to have a major impact on consumer spending. The June report was stronger than expected, with record-hot weather contributing to an increase in spending. July brought cold and rainy weather, which led to a decline in spending as shoppers preferred to stay home. Retail sales declined -1.2% m/m in July, down from +0.6% in June and below the consensus estimate of -0.5%.

The UK consumer’s spending appetite isn’t only dependent on the weather, of course. Consumer spending has been surprisingly resilient in a tough economic environment, but high inflation and rising interest rates are taking their toll. The cost-of-living crisis has created a situation in which sales volumes are falling but the value of goods purchased has been rising – in other words, consumer purchasing power has been falling as consumers are spending more to buy less.

What is bad for consumers may be welcome news for the Bank of England, whose battle with inflation hasn’t gone all that well. The BoE has raised interest rates to 5.25% in order to curb inflation, but a tight labor market and strong consumer spending have contributed to high inflation, which is currently running at a 6.8% clip. If the cracks we saw this week in the labor market and consumer spending continue, it could mean that the BoE has finally turned the corner in its tenacious battle to bring inflation closer to the 2% target.

GBP/USD Technical

• GBP/USD is testing support at 1.2787. Below, there is support at 1.2634
• 1.2879 and 1.2940 are the next resistance lines

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