UK Retail Sales Challenge BoE’s Rate Cut Outlook; GBP/USD Hits Morning High

UK Retail Sales Tops Estimates; Complicates BoE Rate Path

UK shoppers are still opening their wallets despite rising prices and a cooling job market — a trend that complicates the Bank of England’s path forward.

Retail sales rose 0.6% month-on-month (MoM) in July, extending June’s 0.3% increase, potentially fueling demand-driven inflation. Economists expected retail sales to rise 0.2% On an annual basis, retail sales were up 1.1%, slightly above June’s 0.9% pace.

Beyond the headline numbers, the report highlight strong sales volume growth in non-store retailer and clothing store sales. Retailers attributed the uptick to new products, good weather, and the UEFA Women’s EURO 2025.

For policymakers, persistent consumer demand raises a pressing question: Will resilient sales feed demand-driven inflation and further delay rate cuts?

Will Labor Market Cooling Revive Rate Cut Bets?

Before July’s retail sales data, UK inflation and GDP data tempered expectations of further monetary policy easing. The annual inflation rate rose from 3.6% in June to 3.8% in July, while core inflation increased to 3.8% (June: 3.7%). moving further from the BoE’s 2% target.

UK GDP numbers signaled a resilient economy, expanding 0.4% month-on-month in June after contracting 0.1% in May.

Inflation and GDP figures contrasted with recent jobs data, which pointed to a sharp cooling in labor market conditions. According to the Monthly Decision Maker Panel, UK companies cut jobs by 0.5% in the three months to August, the highest since September 2021.

Higher taxes and labor costs, through higher national insurance contributions and minimum wage, forced firms to reduce staffing levels.

However, the Bank of England may need to see the weaker labor market impact on consumption and cool inflation before making a move. BoE Governor Andrew Bailey stated

“There is now considerably more doubt about exactly when and how quickly we can make those further steps.”

Markets are not fully pricing in a 25-basis-point rate cut until April 2026. July’s retail sales figures are unlikely to change the narrative.

GBP/USD Reacts to the Retail Sales Report

Ahead of the UK retail sales data release, the GBP/USD briefly fell to a low of $1.34187 before climbing to a high of $1.34632.

Reacting to the data, the GBP/USD rallied from $1.34614 to a high of $1.34689. On Friday, September 5, the GBP/USD gained 0.25% to $1.34661, reflecting a market reaction to sales data that tempers BoE rate cut bets.

Looking Ahead

Investors should now turn their focus to upcoming GDP (September 12), employment data (September 16), and the inflation report (September 17). The next two weeks could define the BoE’s policy path.

While markets are not fully pricing in a rate cut until April 2026, ING continues to forecast one as early as November 2025, stating:

“We still see room for a BoE rate cut in November – but it wouldn’t take much to derail that. A stronger inflation print this month could shift the outlook. For now, we’re expecting one more cut this year.”

Stay updated here with real-time insights into global macro trends and central bank decisions.