UK Recession Risks Growing Following Retail Sales Slump

Retail Sales Drop in SeptemberFollowing a disappointing CPI reading earlier in the week, the latest data out of the UK today made for further grim reading. UK retail sales were seen falling 0.9% in September, down from 0.4% in August and below the -0.3% the market was looking for. The ONS cited the unseasonably warm weather over the month as the main driver, with consumers holding off from spending money on their Autumn wardrobe.Q3 GDP At RiskWith wage growth having fallen recently unemployment rising and retail activity falling, the near-term UK outlook appears to have dimmed. Given the slump in July and the weak showing in August, retail sales are expected to be a major drag on GDP in Q3. Traders will now be keen to receive the latest BOE economic forecasts on November 2nd.Bailey Warns Further to Go On InflationOn the back of the inflation print this week (with CPI stalling at 6.7%), BOE governor Bailey warned that, despite recent falls, wages were still too high for CPI to fall to target. As such, Bailey warned that the BOE still has a way to go in its fight against inflation. Given the stubbornness in inflation, the risk now is that further stickiness this month will lead the BOE to tighten again in the coming months. While this hawkish narrative should offer GBP some support, the prevailing sentiment is likely to be bearish, in line with the dwindling economic outlook for the UK.Technical ViewsGBPUSDThe sell off in GBPUSD has seen the market trading within a narrow bearish channel. For now, price is stalled at support along the 1.2171 level though, on the back of the sell off, risks remain pointed lower. Bulls will need to see a move back above the 1.2437 level near-term to avoid a fresh move lower down to 1.1843.