• Pound Sterling drops sharply as the UK Retail Sales contracted significantly in December.
• A deepening cost-of-living crisis forced households to cut spending despite the festive season.
• The BoE may continue to reiterate the need for higher interest rates for longer.

The Pound Sterling (GBP) falls sharply as the United Kingdom Office of National Statistics (ONS) reports downbeat Retail Sales data for December. UK household spending contracted significantly as individuals faced the heavy burden of higher interest rates and consumer price inflation, which deepened the cost-of-living crisis. A sharp decline in high street sales would have been expected to ease pressure on the stubbornly high inflation outlook but in the end it was insufficient to move the needle.

A significant contraction in the Retail Sales could have increased the odds of an early rate cut by the Bank of England (BoE). In spite of a significant fall in the UK consumer spending, however, BoE policymakers are expected to maintain a restrictive monetary policy stance until they are convinced that the underlying inflation will return to a 2% target in a timely and sustainable manner.

Going forward, market participants will shift their focus towards preliminary S&P Global PMI data for January, which will be released next week. The UK Manufacturing PMI has been contracting for more than a year and is expected to continue on the backfoot.

Daily Digest Market Movers: Pound Sterling falls sharply on dismal UK consumer spending data

• Pound Sterling faces an intense sell-off as the ONS reports a sharp decline in the Retail Sales data for December.
• Retail Sales excluding fuel prices was down sharply by 3.3% against expectations of a 0.6% fall. The economic data rose by 1.5% in November. On an annual basis, consumer spending (ex fuel) surprisingly contracted 2.1% versus. consensus of a 1.3% increase.
• Monthly sales at retail stores contracted sharply by 3.2% after expanding 1.4% in November. Investors anticipated a slower decline of 0.5%. Annually, consumer spending shrank surprisingly by 2.4% while investors projected a growth of 1.1%. In November, the economic data was slightly increased by 0.2%.
• The downbeat Retail Sales data is expected to ease the sticky inflation outlook.
• This is expected to provide a temporary relief to Bank of England (BoE) policymakers, which got worried about upside risks to price pressures after the release of the stubbornly higher inflation data for December.
• However, the stress of deepening recession fears due to a vulnerable economic outlook will keep BoE policymakers on their toes.
• It would be a balancing act for BoE policymakers to decide whether to turn dovish to safeguard the economy from recession or to maintain a restrictive monetary policy for bringing inflation down towards 2%.
• Meanwhile, investment banking firm Goldman Sachs is anticipating that the BoE will start reducing interest rates from August this year. The brokerage house now expects that interest rates will be reduced by 75 basis-points (bps) by the end of 2024.
• The market mood is quiet amid an absence of US front-line economic indicators. Meanwhile, market participants will focus on the speech from San Francisco Mary Daly.
• Fed Daly is expected to deliver a hawkish guidance on interest rates until policymakers get convinced that inflation will return to 2% in a timely manner.
• On Thursday, Federal Reserve Bank of Atlanta President Raphael Bostic said that rate cuts should only be undertaken if the central bank gets evidence indicating that inflation will return to the 2% target on a sustainable basis.
• Bostic warned that premature rate cuts could boost price pressures and impair efforts made to date to curtail higher inflation.

Technical Analysis: Pound Sterling faces pressure near 1.2700

Pound Sterling drops sharply after facing selling pressure near the round-level resistance of 1.2700. The near-term appeal for the GBP/USD pair is not bullish anymore as it is failing to climb above the 20-day Exponential Moving Average (EMA), which trades around 1.2690. While the 50-day EMA continues to provide support to the Pound Sterling bulls.

The 14-period Relative Strength Index (RSI) trades inside the 40.00-60.00 range, indicating a consolidation ahead amid absence of a potential economic trigger