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The British Pound fell against the Euro, Dollar and other currencies after UK retail sales for December disappointed; however, economists say sunnier days lie ahead for the UK high street.

The Pound to Euro exchange rate dipped to 1.1656 in the minutes after the ONS said UK retail sales read at -3.2% month-on-month in December, undershooting expectations for -0.5%.

The year-on-year figure stood at -2.4%, which was over 3.5 percentage points below the 1.1% growth the market expected. "The pound predictably fell after this morning’s retail sales figures, trading below $1.27 and also dipping briefly below €1.1650," says Hann-Ju Ho, an economist at Lloyds Bank.

The Pound to Dollar exchange rate fell 0.14% to reach 1.2676, rubbing off some of the shine from what has been a strong week for the British Pound.

"The pound slipped on the retail sales news, and GBP/USD is back below $1.27. Gilt yields are also lower, and the 2-year Gilt yield fell 8 basis points on Thursday. There could be more declines on Friday as the market re-asses the Bank of England’s rate cut expectations now that there is solid data to suggest the UK consumer is under pressure," says Kathleen Brooks, an analyst at XTB.

According to the ONS, December's decrease was the largest monthly fall since January 2021, when coronavirus restrictions affected sales.

The soft sales speak of a consumer struggling under the weight of months of extraordinary inflationary pressures and rising interest rates. Although inflation is coming down, the prices in shops continue to increase, albeit at slower rates.

Weakness was widespread, according to the ONS, with food, non-food and online retailers all seeing lower sales volumes.

On an annual basis, sales volumes fell by 2.8% in 2023 and were at their lowest level since 2018.

The above chart from ING shows UK retail sales volumes are trending lower and have been doing so ever since the inflationary surge began in 2021.

ING economist James Smith says there is something "a bit suspect" in the December release: "The consumer backdrop is improving and I suspect we'll see retail sales recover a lot of December's drop in Q1."

Economists at TD Securities write that while some of today's decline certainly appears to be a normalisation from November's strong 1.4% m/m increase, today's data appears to some extent to be "unjustifiably weak", even when accounting for weak demand.

"It seems more likely to us that a big bulk of today's decline was driven by a one-off effect that should reverse in the coming months," says TD Securities.

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The British Pound had been an outperformer this week, thanks mainly to Wednesday's report of an unexpected rise in year-on-year inflation to 4.0% in December that drove markets to lower expectations for the scale of Bank of England rate cuts in the coming months.

Although inflation surprised by rising, economists remain adamant it will fall back to the 2.0% target this year, with more and more saying this will happen as early as April.

With wage growth continuing to outstrip inflation, the outlook for UK consumers has improved markedly, and this will offer pretty conditions for retailers in the months ahead.

Simon French, Chief Economist and Head of Research at Panmure Gordon, says despite the soft retail data, "the UK’s economic outlook has improved markedly over the last twelve months. Benchmarking its economic momentum against other major European economies, the UK has moved up from 8th of 9 last January, to 3rd of 9 currently."