UK  retail sales disappoints, GBP set to decline against EUR

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 Retail sales disappoints in the first month of the year remaining vastly below its 5-year average
 "A continued slowdown" in retail sales the most likely scenario in the longer-term according to the ONS
 EURGBP seems to be set to continue rising toward a crucial resistance
 
UK retail sales came in well below market expectations in January both in a monthly and yearly basis as consumers still felt a wage squeeze due to elevated price growth. The data seems to undercut odds for the first rate hike in the economy to some extent, however, interest rate traders remained remarkably calm as the likelihood for an increase in June just barely decreased in the aftermath of the release.


The underlying trend in UK retail sales remains tilted to the downside despite a subtle increase in a year-over-year basis in January.


Both headline and core retail sales increased 0.1% mom in January missing expectations placed at 0.5% and 0.6% respectively. The y/y terms turned out to be sub-par alike as we got 1.6% and 1.5% for headline and core gauges respectively whereas economists surveyed by Bloomberg had indicated at 2.5% and 2.4% adequately. In order to assess the underlying trend one needs to take a closer look at the chart above as it illustrates uninterruptedly lacklustre momentum there boding not well for household expenditure as a contribution to GDP growth going forward.


Let as recall that earlier this month the Bank of England warned that the economy may need a quicker pace of rate hikes mainly due to disappearing slack in the labour market. Let us point that interest rate traders see roughly 70% chances for a hike till June this year, hence one may assume that much of that has been already priced in. Therefore the pound on its own seems to have just tiny scope to grow from the current levels while the grim outlook for consumption could yet undermine GBP performance in the near-term. At last, keep in mind that if the BoE began hiking rates this year, it would carry an additional drag on consumers’ pockets trimming their share in growth. In a nutshell, while the GBP seems to be still notably undervalued given the long-term, it could be prone to a pullback in the shorter-term when US dollar weakness subsides at least for a while.  


The EURGBP appears to be en route to keep on rising toward its critical resistance zone at around 0.90. Should the pair achieve this level, one may expect more buyers wanting to cash in on their longs