Drop in UK retail sales furthers pound’s decline

Raising the spectre for quantitative easing, UK retail sales posted a surprise fall of 0.2% over the month in September, following on from August's 0.7% decline.

It's been a tough week for sterling with the Spending Review and MPC minutes, and today's figures simply add to the picture of a stalling recovery. The market had expected the data to reveal modest growth but clearly consumers were cautious in the run up to the announcement of the budget cuts.

The figures have done little to help sterling remerge from its current trough. Reaching a new six-month low against the euro this morning, the pound is currently trading around 1.1250.

Duncan Higgins, senior analyst at Caxton FX says, "The problem for the pound is the consistent speculation about quantitative easing (QE). Any currency that has that prospect hanging over it is likely to underperform. The MPC minutes revealed that additional stimulus is very much on the agenda, and today's data is only going to strengthen the case for QE. Currently the majority of the committee are sitting on the fence but it may not take many more disappointing figures to see a decisive swing in favour of Adam Posen's camp."

The pound's decline against the euro has been underlined by the contrasting views of the MPC and the ECB.

"With certain ECB members calling for an exit to emergency strategies, and BoE members voicing quite the opposite, sterling's direction is really only inclined to be one way," continues Higgins.

Sterling is still due a recovery heading into year end.

Duncan Higgins concludes, "The market to a large extent has priced in the possibility of the Bank of England extending its asset purchase budget. But with inflation as high as it is, this is far from a foregone conclusion. If the Bank stays its hand at the next meeting, sterling should regain some ground, as investors unwind bets of further stimulus measures."