Pound Sterling sets for a breakdown amid weak UK Retail Sales data

• Pound Sterling dropped after data showed that UK Retail Sales declined by almost 1% in September.
• The decrease in Retail Sales suggests a weakening household’ spending, which is the main driver of the UK economy.
• The Bank of England is widely expected to leave interest rates unchanged.

The Pound Sterling (GBP) retreated after the UK Office for National Statistics (ONS) reported weak Retail Sales data for September. UK households have postponed their demand for core goods as higher borrowing costs and stubborn inflation have squeezed their spending power. The GBP/USD pair has been exposed to more downside as declined consumer spending indicates that the overall demand will remain vulnerable, which would force UK firms to scale down their operating capacity further.

The consequences of a slowdown in the retail demand would be borne by producers and job-seekers as weak consumer spending could result in lower production by firms and henceforth soft demand for labor. For Bank of England (BoE) policymakers, poor retail demand cuts consumer inflation expectations significantly and cools the economy. This would allow the BoE to extend the rate pause to the November monetary policy meeting.

After the release of the Retail Sales, data, BoE Governor Andrew Bailey, in an interview with Belfast Telegraph, remained confident over a market fall in inflation next month. Next week, the release of the Employment data will provide more cues about BoE's policy in November.

Daily Digest Market Movers: Pound Sterling remains vulnerable amid risk-off mood

• Pound Sterling fell back toward the round-level support of 1.2100 as UK Retail Sales contracted more than expected in September.
• Monthly Retail Sales, a key measure of consumer spending, dropped by 0.9% against the expectations of a 0.1% decline. In August, Retail Sales rose by 0.4%. Annually, sales contracted by 1.0% while economists forecasted a stagnant performance.
• Retail Sales excluding fuel also dropped by 1.0% and 1.2% on a monthly and an annual basis, respectively.
• Weak Retail Sales suggest that high inflation and borrowing costs have significantly squeezed pockets of households.
• A sharp decline in consumer spending is expected to dent consumer inflation expectations significantly.
• Weakening spending could lean the Bank of England towards keeping interest rates unchanged at 5.25% on November 2.
• It would be a tough call for BoE policymakers as inflation data for September surprisingly topped expectations marginally.
• Monthly headline inflation rose by 0.5% while investors forecasted a growth rate of 0.4%. Annual headline CPI data grew at a steady pace of 6.7%, higher than the expectations of 6.5%.
• The UK inflation data for September indicated that the BoE has a long way to go to bring down inflation to 2%.
• UK’s highest inflation among G7 economies is giving more air to discussions about raising the inflation target to 3%.
• British think-tank The Resolution Foundation said that a higher inflation target would allow the central bank to reduce borrowing and bond-buying needs and would provide more stimulus.
• The US Dollar recovers some losses after neutral guidance on interest rates from the Federal Reserve (Fed) Chair Jerome Powell delivered on Thursday.
• Jerome Powell joined his colleagues and cited that the recent jump in US Treasury yields has significantly tightened overall financial conditions. However, US economic strength and tight labor market conditions could warrant more interest rate hikes.
• On Thursday, the US Department of Labor reported the lowest weekly jobless claims in nine months. Individuals claiming jobless benefits for the first time in the week ending October 13 were at 198K, lower than expectations of 212K and the former release of 211K.
• Meanwhile, the market mood remains downbeat amid Middle East tensions. The support from Western nations to Israel has escalated expectations of Iran’s intervention in the Israel-Palestine conflict.
• After US President Joe Biden supported Israel against the Hamas group, UK Prime Minister Rishi Sunak told Israel: “We want you to win”.

Technical Analysis: Pound Sterling struggles to sustain above 1.2100

Pound Sterling drops sharply after weak Retail Sales data. The GBP/USD pair falls toward a two-week low at 1.2110. The broader Cable outlook is vulnerable as it faced immense selling pressure while attempting to cross the 20-day Exponential Moving Average (EMA) on the upside. Momentum oscillators have shifted into the bearish range, warranting more downside. A further breakdown could drag the GBP/USD pair toward the psychological support of 1.2000.