Update; The Euro has been able to register solid gains against the Pound following a serious disappointment from December UK retail sales. January’s year-on-year sales growth clocked in at just 1.5% – well under half what was expected. Sales fell -0.3% on the month, partly thanks to the upwards revision in December’s decline from -1.9% to 2.1%. Forecasts had been for 0.9% growth on the month.
This comes after average weekly earnings clocked in at 2.6% with bonuses – a surprise weakening on the previous 2.8% – while earnings excluding bonuses slowed from 2.7% to 2.6%.
This makes it likely consumer spending will slow as households battle rising costs and shrinking disposable incomes. With no reprieve likely to come in the short-term from the Bank of England (BoE), this could be bad news for the UK’s vital services sector, which is largely driven by consumer spending.
Original article continues below…
A lack of data could leave the Euro vulnerable today, yet the common currency could gain against the Pound if UK labour market data disappoints.
Eurozone trade balance figures are the only notable data for the bloc, making it likely Sterling could be the main driver of movement today.
The Euro Pound exchange rate is tentatively declining from opening levels after yesterday’s marked GBP sell-off triggered by underwhelming consumer price data.
Today’s reports include the latest jobless claims and claimant count change for January, as well as the key average weekly earnings figures for the three months ending December.
Investors want to see that wage growth accelerated towards the end of 2016, as rising household incomes will help consumers to battle surging consumer prices.
Inflation clocked in at a two-and-a-half-year high of 1.8%, but this was below the forecast 1.9% and so dampened hopes of an interest rate hike from the Bank of England (BoE).
This kept the Euro buoyant, despite a raft of below-forecast growth figures for the Eurozone. Most of the quarterly and annualised reports released yesterday, covering Germany, Italy and the currency bloc as a whole, saw economic expansion clock in ten basis points below-forecast.
Although a disappointment, the overall pace of growth remains solid, so the Euro Pound was able to advance.
Slow UK price growth furthered the Euro advance. Inflation is still forecast to continue spiking, but the slower-than-expected pace seen in January suggests the Monetary Policy Committee (MPC) will feel justified in its latest inflation report, which barely revised up earlier forecasts for Q1 price growth.
With the Bank of England unlikely to act soon to curb price growth, consumers are set to feel the squeeze unless wages rise.
If wage growth figures remain muted, as they are forecast to, investors will see this as a sign that household incomes will be squeezed and consumers will cut back on their spending.
This could have a notable impact upon the UK economy, which is driven entirely by the service sector and therefore relies on strong consumer spending for growth.