Pound Drops as UK Retail Sales Underperform

The British pound experienced a decline early in the European session on Friday. This drop came after UK retail sales in May fell more than expected, with particularly weak performance in food stores.

Data from the Office for National Statistics revealed that retail sales in the UK were down by 2.7 percent in May on a monthly basis, in contrast to a revised 1.3 percent increase in April. Analysts had forecast a modest drop of 0.5 percent.

While April’s good weather supported a 4.7 percent growth in sales, May saw overall sales slip by 5 percent, and non-food store sales decreased by 1.4 percent.

When auto fuel is excluded, retail sales dropped by 2.8 percent compared to a 1.4 percent rise in April, exceeding the expected 0.5 percent decline.

Annually, retail sales fell by 1.3 percent following a 5.0 percent increase in April. Similarly, excluding auto fuel, sales volume fell 1.3 percent in May after a 5.2 percent gain the month before.

In other economic updates, UK public sector net borrowing increased in May, despite higher government receipts. The Office for National Statistics reported that borrowing reached GBP 17.7 billion—a GBP 0.7 billion increase over last year—surpassing the forecast of GBP 17.1 billion by the Office for Budget Responsibility. This marked the second highest May borrowing since 1993.

On the geopolitical front, tensions continue to influence market sentiment. Israeli Prime Minister Benjamin Netanyahu has ordered more intense strikes on Iranian targets in Tehran, described as ‘strategic’ and ‘government’ sites. This decision follows an Iranian missile strike on a hospital in Beersheba and an attack on a leading research institute in Israel known for its work in life sciences and physics.

Meanwhile, the Bank of England held interest rates steady at 4.25 percent during its Thursday monetary announcement. The weak UK retail data is leading traders to expect further rate cuts later this year. Following a 6-3 vote to maintain current rates, many anticipate at least two more reductions before year’s end.

Bank of England Governor Andrew Bailey noted that interest rates remain on a “gradual downward path” and confirmed that the bank will continue its cautious easing of monetary policy. However, he warned that rising energy prices and a softening labor market pose serious risks amid escalating tensions in the Middle East.

In Asian markets today, the British pound showed some improvement against its major rivals. During early European trading, the pound slid to 0.8552 against the euro, with analysts eyeing support around the 0.86 level. Against the US dollar, Japanese yen, and Swiss franc, the pound dropped from recent highs, and further declines may see support at approximately 1.32 (USD), 193.00 (JPY), and 1.08 (CHF) respectively.

Looking ahead, several key economic releases are scheduled during the New York session, including Canada’s new housing price index for May, April retail sales data, the Producer Price Index for May, raw materials price data, the US Philadelphia Fed manufacturing index for June, the US Consumer Board’s leading index for May, Baker Hughes’ oil rig count, and a Eurozone flash consumer confidence measure for June.