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FTSE 100 gains after poor UK retail sales data sends sterling lower

Bad news for the UK economy was good news for the FTSE 100 on Friday, as disappointment around UK retail sales translated to hopes the Bank of England would soon cut interest rates.

London’s leading index had been under pressure for most of the week after inflation surprisingly rose in December, reducing bets on rate cuts. 

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However, investors will be conscious the Bank of England does not want to risk tipping the UK economy into recession by keeping rates at elevated levels, regardless of what inflation is doing.

UK retail sales data for December points to a struggling consumer and worsening picture for the economy, which has been corroborated by major UK recruiters providing insight into a slowing jobs market.

“UK retail sales were significantly lower than expected, dropping 3.2% month-on-month in December, according to data from the ONS. This represents the largest monthly fall since January 2021 and is a clear signal of weakening sentiment,” said Sophie Lund-Yates, lead equity analyst, Hargreaves Lansdown.

After this morning’s terrible retail sales data, the pound sank, and the inverse relationship with the FTSE 100 kicked in, sending the index 0.4% higher in mid-morning trade.

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“A decline in the pound after weak UK retail sales data gave a boost to the multitude of companies in the FTSE 100 whose share prices are denominated in sterling, but which have US dollar earnings,” said Russ Mould, investment director at AJ Bell.

“This trend helped to lift the FTSE…and make up for some of the territory lost earlier this week. Anglo American, Fresnillo, Ashtead and Rentokil were among the key beneficiaries from the currency movement.”

Persimmon made a good showing after being upgraded by Morgan Stanley to overweight.

“Persimmon was another stock to bounce back after weakness earlier this week thanks to a positive broker note from Morgan Stanley which upgraded its rating to ‘overweight’,” said Russ Mould.

“Housebuilders and property stocks had been battered by the bigger than expected UK inflation data which caused investors to panic that the Bank of England would not be cutting interest rates any time soon.”

UK-focused retailers were among the worst performers as traders reacted to the poor retail sale data. Ocado was down 1.2% and was the top faller, closely followed by Kingfisher, Whitbread, and Marks & Spencer.

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