0.4% MoM decline in United Kingdom retail sales in September vs. -0.1% forecast

United Kingdom (UK) Retail Sales, a key indicator of consumer spending, declined 0.4% month-on-month (MoM) in September. Figures released on Friday by the Office for National Statistics (ONS) showed that the fall followed a 0.7% increase in August, revised from 0.5%. Markets had expected a smaller decline of 0.1% for September.

Further updates to follow.

Pound Sterling: Key Questions

Pound Sterling: Origins and FX Market Share

Accounting for 12% of global foreign exchange (FX) transactions, the Pound Sterling (GBP) ranks as the world's fourth most traded currency. Average daily turnover is $630 billion, according to 2022 data. The United Kingdom's official currency dates back to 886 AD, making it the world's oldest. Among its main currency pairs, GBP/USD, known as ‘Cable’, represents 11% of FX trading. GBP/JPY, referred to by traders as the ‘Dragon’, accounts for 3%, while EUR/GBP represents 2%. The Bank of England (BoE) issues the Pound Sterling.

Bank of England Policy Drives Pound Sterling

Monetary policy set by the Bank of England is the strongest influence on the Pound Sterling's value. Policy decisions depend on whether the BoE has met its central objective of “price stability”, meaning inflation holding steady at around 2%. Interest rate adjustments are its main means of achieving that goal. To curb excessive inflation, the BoE raises interest rates, increasing borrowing costs for households and businesses. Higher rates generally support GBP by making the UK a more attractive destination for global investment. By contrast, inflation that falls too low signals slowing economic growth. The BoE will then consider cutting interest rates to reduce borrowing costs, encouraging businesses to take out more loans for projects that generate growth.

Economic Indicators Shape Sterling's Direction

The Pound Sterling can respond to economic releases because they reveal the economy's underlying health. GDP, manufacturing and services PMIs, and employment figures can all determine GBP's direction. Economic strength supports Sterling by drawing in foreign investment. It may also prompt the BoE to raise interest rates, directly strengthening GBP. Weak economic figures, by contrast, are likely to weigh on the Pound Sterling.

Trade Balance: A Further Driver of the Pound

The Trade Balance is another important release for the Pound Sterling. Over a specified period, it measures export earnings against spending on imports. Strong foreign demand for a country's exports creates additional demand for its currency as overseas buyers seek to purchase those goods. A positive net Trade Balance therefore strengthens the currency, while a negative balance has the opposite effect.

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