Pound Sterling in Soft Start Against Euro and Dollar after Retail Sales Crumble

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Pound Sterling stumbled into the final session of the week after Office for National Statistics (ONS) data suggested UK retail sales crumbled in September, effectively erasing more than two years of gains built since the first coronavirus-inspired closure of the economy in 2020. 

Retail spending fell by 1.4% in September when measured by the number of items purchased in what was a far larger decline than the -0.5% anticipated by consensus and one that came alongside a negative revision to the ONS estimate for August sales growth, which was restated as -1.7%.

"In the three months to September 2022, sales volumes fell by 2.0% when compared with the previous three months; this continues the downward trend seen since summer 2021. Food store sales volumes fell by 1.8% in September 2022, which leaves them 3.2% below their pre-coronavirus levels in February 2020," the ONS said on Friday.

While September's bank holiday saw many retail outlets closed and so would have been responsible for some of the latest decline in sales, the September outcome does also reflect the continuation of a well-established trend for which retailers continue to cite the effect of rising prices and the cost of living.

"In theory, retail sales have scope to recover a little in Q4, given that households’ disposable incomes are being strongly supported by one-off grant payments from the government. Indeed, the average household will be spending slightly less on energy over the next six months than in Q2 and Q3," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

Above: Snapshot of interbank reference rates for Sterling as of 0930am update. Source: Netdania Markets. 

Falling sales volumes were felt both online as well as bricks and mortar retailers during September although sales remained substantially higher for online retailers than they were back in February 2020 and the final month before the first coronavirus-related closure of the economy. 

Online sales remained more than 18% above their February 2020 levels in September, suggesting that falling consumer demand has so far been mainly a bricks and mortar or high street story, although September's data indicates that this may have changed heading into the final quarter.

Friday's data came at the tail end of a volatile week that also included the resignation of another Prime Minister and which has effectively fired a starting pistol on a desperate scramble by the governing party to nominate a replacement, the identity of which is expected to be known before month-end.

"Markets could remain wary of another potential takeover by the right wing of the Tory party that could complicate the BoE’s job of fighting inflation. In turn, the GBP reaction could be more negative," says Valentin Marinov, head of FX strategy at Credit Agricole CIB.

"We further doubt that the FX investors would welcome a Johnson return given how chaotic the ex-PM’s reign has been. They will likely want more clarity on the course of future government policies given that its ‘levelling-up’ plans will have to be reconciled with the BoE’s fight against inflation," Marinov added.

Above: Pound to Dollar rate shown at 15-minute intervals alongside Pound to Euro rate. Click image for closer inspection.