Speculation surrounding the pound sterling is further complicated by a series of mixed UK economic data releases this week.

The pound sterling edged lower in New York session trading on Friday (19/January) in light of the release of disappointing UK retail sales data. GBP/USD was stuck at around 1.2700, while EUR/GBP rebounded from a one-month low.

gbpusd

At the beginning of this week, analysts had predicted that Sterling would be bearish because economic data might miss expectations. Subsequent developments confirmed these concerns.

Wage data released on Tuesday showed slower-than-expected growth. UK CPI data released on Wednesday depicted prices rising above expectations during December, but PPI inflation data was negative. The retail sales report released today was also sluggish.

UK retail sales data recorded a 3.2% (month-over-month) decline in December 2023, whereas the consensus only anticipated a 0.5% (month-over-month) decline. Core retail sales slumped further by -3.3% (month-over-month) in the same period, much weaker than the consensus estimate of -0.6% (month-over-month).

The series of data complicates market speculation around Bank of England (BoE) interest rates. The BoE will be reluctant to cut interest rates if CPI inflation remains high. However, other data reveals the risk of a more severe setback if interest rates remain high for too long.

"The pound slipped on the retail sales news, and GBP/USD is back below $1.27. Gilt yields declined, and the 2Y Gilt yield fell 8 basis points on Thursday. There could (be) further downside on Friday as markets re-evaluate current BoE rate cut expectations in the face of solid data showing the UK consumer is under pressure," said Kathleen Brooks, analyst at XTB.

Current market data suggests a roughly 50% chance of a BoE rate cut scenario starting next May. Experts continue to disagree on when the BoE will start lowering interest rates. In line with that, the pound sterling weakened limitedly against the US dollar. The cable needs further catalysts to help it break out of the sideways range it has formed since late December.