GBP/USD plunges after sobering March UK retail sales data; recession bells ring

The GBP/USD pair dropped slightly after the Office of National Statistics (ONS) released disappointing March retail sales numbers.

UK March retail sales disappoint

The headline retail sales in the UK declined by a record 5.1% in March according to a new worrisome report by the ONS. This was worse than the 4.7% that analysts polled by Bloomberg were expecting. At the peak of the last financial crisis, sales dropped by just 3.5%.

The retail sales dropped by an annualised rate of 5.8%, which was worse than the analysts’ forecast of 4.7%. The sales declined by 1.60% during the final crisis.

Meanwhile, the core retail sales declined by a month-over-month rate of 3.7%, which was lower than the previous decline of 0.5%. Similarly, it dropped by 3.7% during the month. The core retail sales number removes the volatile food and energy products.

According to the ONS, the slump in retail sales was mostly driven by a sharp decline in clothing stores, which declined by 34.8% in March. An increase in food stores whose sales rose by 10.4% offset the declines. Also, online sales rose to a record high of 22.3% while the volume of supermarket stores rose by 10.3%.

In a statement, the ONS said:

The reporting period for March 2020 was from 1 March to 4 April 2020 meaning that two weeks of the five-week trading period was under social distancing measures introduced as the government moved into the "delay" phase of the coronavirus response.

The retail sector is an important component of the UK economy. According to Retail Economics, the sector employs more than 2.9 million people, equivalent to 4% of the total population. Also, the total value of retail sales in the UK were more than £394 billion in 2019. Therefore, a significant hit in the industry will be damaging for the economy and the British pound.

Streak of weak economic data

The weak UK retail sales data came a day after Markit released worrisome manufacturing and services PMI data from the country. The data showed that the manufacturing PMI dropped to a record low of 32.9 while the services PMI slid to a record low of 12.3. This brought the composite PMI to an unheard low of 12.9.

These numbers show that the UK economy will contract by a bigger number than what most people were expecting. In a statement to Bloomberg, Victoria Clarke, a prominent economist said:

“Seeing the numbers in cold hard print and witnessing the depths of the reported falls in output is sobering. Whilst the evidence today highlights the depth of the contraction underway, the robustness of any subsequent rebound remains an open question.”

In another statement, Dan Hanson, an economist at Bloomberg predicted that the economy would contract by 2.6% and 17% in the first and second quarters respectively. The BOE has also raised the possibility of the economy contracting by 35% in the second quarter. Worse, a report by the NISR estimates that the unemployment rate would rise by 20%.

At the same time, the government is planning to mobilise more than $222 billion in May and July. These funds will be used to expand funding for the NHS, increase welfare benefits, and provide grants to local authorities.

GBP/USD technical outlook

On the four-hour chart below, we see that the GBP/USD pair has been falling after reaching a peak of 1.2660 on April 14. The pair has also formed a head and shoulder pattern, with the neckline being at the 1.2163 support level. Therefore, the pair may continue falling and possibly test this neckline after it moves below the 50% Fibonacci retracement level.