Weak retail sales put sterling on the back foot

The monthly improvement in UK retail sales seen over the past few months has come to an abrupt halt, with data this morning revealing a drop of 0.5%.

It marks the first monthly decline in sales since January and has led to a sharp sell-off in sterling in the immediate aftermath. By comparison, July registered a monthly increase of 1.1% and even pessimistic forecasts had called for 0.3% rise in August. However, the combination of poor summer weather and impending government budget cuts has kept buyers away from the high streets, raising the likelihood that the UK economy will register a slower pace of economic expansion in the second quarter.

Duncan Higgins, senior analyst at Caxton FX comments, "The data rather confirms fears that the UK economy is set to post a disappointing GDP figure for the third quarter. Food, fuel, clothing, and household good sales all made moderate declines in August as consumers tighten their pockets ahead of what is set to be a tough end to the year."

Unsurprisingly, sterling has taken a sharp tumble as the question of further quantitative easing returns to focus.

"The Bank has reiterated on a number of occasions its readiness to add further stimulus if conditions deteriorate further. It will not take too much more data along a similar line to this morning's to spur the Bank into action," continues Higgins.

Having dropped back below $1.56 sterling has made a slight recovery with the market still apprehensive about the Fed's monetary policy outlook.

Higgins concludes, "Following the news that the Fed could be extending stimulus in November, the market is wary of taking up dollar positions. Sterling's fall against the single currency has seen it slide from 1.20 down to 1.19 but it's stopped short of dropping through that level with investors still cautious about the euro's short term outlook."