UK retail sales data for December are due for release at 0930 GMT on Friday, with forecasts pointing to a tumble in monthly terms, but a rebound on a yearly basis. The actual prints could show whether the squeeze in real incomes continues to weigh on consumer spending, and may go a long way in determining whether the BoE will take action anytime soon.
UK retail sales have been on a weakening path for over a year now, something attributed to the squeeze in real incomes that has taken place following the Brexit vote. With UK inflation accelerating but wage growth remaining largely flat, the real disposable income of UK consumers is being squeezed, feeding into a slowdown in retail sales. This is also one of the factors that has kept the Bank of England (BoE) away from pressing the hiking button too often, on concerns that rising borrowing costs could weigh further on incomes and thereby, hurt consumption and economic growth.
So, what are the upcoming data expected to show? In monthly terms, UK retail sales are forecast to have fallen in December. The headline print is expected to dip by 0.6% m/m after rising 1.1% m/m in November, while the core number – which excludes fuel for automotives – is anticipated to decline 0.8% m/m, having risen 1.2% m/m previously. That said, both of these measures are expected to accelerate to 3.0% in yearly terms. This implies that even though retail spending in December may have been softer than November, it may have still been 3.0% higher compared to a year ago (i.e. December 2016).
Better-than-anticipated prints could ease some concerns regarding a slowdown in UK consumption and perhaps spur bets for the BoE to deliver more than one 25bps rate increase this year. Something like that could bring the pound under renewed buying interest. In this scenario, sterling/dollar could surge and challenge the round figure of 1.3900, where an upside break could even see scope for extensions towards 1.3940, near the pair’s latest highs.
On the other hand, if retail sales disappoint relative to the forecasts, then sterling/dollar could correct lower and target the 1.3800 support zone. Should sellers prove strong enough to overcome that territory, the next support area that could come into play is 1.3750. As always, the magnitude of any market reaction will depend on the extent of the deviation of the actual prints from the forecasts.
As for what the major gauges of retail sales showed during the month, the Visa consumer spending index slid somewhat further in December to -1.0% y/y, while the British Retail Consortium (BRC) retail sales monitor held flat at +0.6% y/y. Both of these indicators come in contrast with the official forecasts, which expect retail sales to accelerate in yearly terms.
