Lacklustre economic data takes shine off the pound

Pound slipped into negative territory on Thursday (19 October) after UK retail sales data pointed to a decline in volumes to their lowest level of growth in four years, and Spanish politics saw traders bet the Swiss franc up versus the euro.

At 3:40pm BST, the pound was down 0.10% and 0.49% against the dollar and euro respectively, exchanging at $1.3192 and €1.1141, after the UK Office for National Statistics (ONS) said British retail sales fell 0.8% month-on-month, compared with analysts' forecast for a 0.1% decline, while the 1% increase recorded in August was revised down to 0.9%.

"The main reason for this slowdown [in sales] is inflation," said Andrew Sentance, senior economic adviser at PwC.

"Prices of goods bought in shops, at petrol stations and online in September were 3.3% up on a year ago, whereas only a year ago they were falling by 1%.

"This surge in inflation - which mainly reflects the fall in sterling since the EU Referendum vote - is squeezing consumers and holding back the growth of retail spending in volume terms."

The report comes a day after the ONS warned wages continued to lag behind inflation.

Meanwhile, the euro suffered jitters of its own after the Spanish government said it will start suspending Catalonia's autonomy from Saturday, after the region's leader threatened to declare independence.

The government said ministers would meet to activate Article 155 of the constitution, allowing it to take over running of the region.

Catalan leader Carles Puigdemont said the region's parliament would vote on independence if Spain continued "repression".

The development saw traders seek the safe haven comfort of the Swiss franc, and bet on the euro down versus the currency. At 3:51pm BST, the euro was down 0.22% versus the Swiss currency changing hands at CHF1.1545.

Lukman Otunuga, research analyst at FXTM, said while the euro remained resilient versus the pound, the currency vulnerability to a Catalonian flare-up cannot be ignored.

"The political drama in Spain will spark concern over political instability in Europe. With uncertainty potentially mounting after Spain's government triggers Article 155 this weekend, the euro remains exposed to downside risks. Investors should keep in mind that although the Catalan drama is limited to Spain, it could still spark fears over the rise of other separatist movements in Europe. Such a situation is likely to threaten the stability of the European Union."