Financial market research and analysis

Retail sales and the general health of the high street have been big themes for the start of 2018. Investors have been watching carefully as big retail names release their trading updates, to see how they fared over the crucial Christmas period. So far, the results have been mixed, Next impressed surpassing expectations, JD Sport was another strong performer and just yesterday Primark also surprised on the upside; however, profit warnings have also emerged from Mothercare and sales at Burberry were noticeably off the mark, whilst M&S and Tesco also suffered sales slump.

Given the mixed nature of the results so far, it has been difficult for investors to draw any solid conclusions regarding consumer resilience. This should change today with the release of UK retail sales data at 09:30GMT this morning.

Official UK Retail sales for December are expected to have declined 0.1% month on month down from a month on month increase of 1.2% in November. Meanwhile, the annual reading is expected to have increased to 2.6% from 1.5% in November.

The British Retail Consortium survey, which was released last week, showed that sales between 26 November – 30 December were 1.4% higher than the same period a year earlier. These figures bode well for the release tomorrow amid a general consensus the consumers continued to spend, but shunned more expensive shops in favour of cheaper alternatives.

Why do retail sales matter right now?

Retail sales data is important because the UK economy is so heavily reliant on the consumer. Over 80% of economic activity is derived from the service sector, so any slowdown in spending can have a serious and noticeable impact on the economy. Since the Brexit referendum, the UK consumer has been facing a challenging environment of higher inflation, so increasing prices, but average wage growth, which is failing to keep pace with inflation. This means consumers are experiencing a wage decrease in real terms. So far, the consumer has proved to be relatively resilient in the face of the difficult climate, but investors are starting to get nervous that this may not last.

Expected market reaction:

The pound has been holding up extremely well versus the dollar, hitting a high of $1.3940 on Wednesday, it highest level versus the greenback since Brexit. A quiet UK economic calendar for most of the week means momentum, in addition to a weaker dollar propelled sterling to these levels. The pound is within touching distance of the important $1.40 psychological level, a strong retail report later this morning could provide the necessary stimulus to push the pound back towards this level, although strong resistance may be seen again around $1.3940.

On the other hand, should retail sales disappoint the GBP/USD could lose some ground. However, it is worth noting that the trend is bullish right now and there are quite a few solid support levels which the bears would need to break down before a meaningful reversal is in place.  Key levels of support on the downside include $1.3840 followed by $1.3800, down to $1.3770.

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