Pound Sterling drops sharply as the UK Retail Sales contracted significantly in December.

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• Pound Sterling drops sharply as the UK Retail Sales contracted significantly in December.
• A deepening cost-of-living crisis forced households to cut spending despite the festive season.
• The BoE may continue to reiterate the need for higher interest rates for longer.

The Pound Sterling (GBP) falls sharply as the United Kingdom Office of National Statistics (ONS) reports downbeat Retail Sales data for December. UK household spending contracted significantly as individuals faced the heavy burden of higher interest rates and consumer price inflation, which deepened the cost-of-living crisis. A sharp decline in high street sales would have been expected to ease pressure on the stubbornly high inflation outlook but in the end it was insufficient to move the needle.

A significant contraction in the Retail Sales could have increased the odds of an early rate cut by the Bank of England (BoE). In spite of a significant fall in the UK consumer spending, however, BoE policymakers are expected to maintain a restrictive monetary policy stance until they are convinced that the underlying inflation will return to a 2% target in a timely and sustainable manner.

Going forward, market participants will shift their focus towards preliminary S&P Global PMI data for January, which will be released next week. The UK Manufacturing PMI has been contracting for more than a year and is expected to continue on the backfoot.

Pound Sterling drops sharply after facing selling pressure near the round-level resistance of 1.2700. The near-term appeal for the GBP/USD pair is not bullish anymore as it is failing to climb above the 20-day Exponential Moving Average (EMA), which trades around 1.2690. While the 50-day EMA continues to provide support to the Pound Sterling bulls.

The 14-period Relative Strength Index (RSI) trades inside the 40.00-60.00 range, indicating a consolidation ahead amid absence of a potential economic trigger.

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