24.06.202212:36 Forex Analysis & Reviews: UK economy slides into recession

Pound fell after retail sales in the UK showed a decrease in May this year. Apparently, consumers were forced to cut back on spending because of rising food prices and broader cost of living. The Office for National Statistics reported that the index is down 0.5%, slightly better than the expected decline of 0.7%. But if automotive fuel is excluded, sales are 0.7% lower.

This is the third decrease in the last four months, not to mention it was pulled by a 1.6% drop in food sales. According to supermarket owners, people are now spending less money on groceries because of rising cost of living.

Headline inflation also reached 9.1%, the highest in four decades. Total retail sales in the past three months also fell by 1.3%, which suggests that the economy will continue to contract at a faster pace in the second quarter of this year.

Obviously, the UK is facing a crisis, where consumers are compelled to save money. This is bad news for the ruling Conservatives, and Prime Minister Boris Johnson in particular. To cope with this, the government recently announced a multi-billion dollar support package for households, but experts note that even such unprecedented assistance will not be enough to maintain sentiment.

This is why it is not surprising that UK consumer confidence tumbled to a record low, hitting minus 41, which is the lowest reading in 48 years. The risk of a recession has affected consumers' outlook on the future, both for their own finances and for the economy as a whole. In addition, the prospect of summer strikes and sharp rise in interest rates weigh heavily on consumer sentiment. The Bank of England said it was willing to sacrifice economic growth to cope with high inflation, which could exceed 11% by the end of the year.

So even though pound rallied yesterday and is on its way to local highs, growth became limited and is dependent on 1.2320. A consolidation above it will lead to an upward swing to 1.2365 and 1.2400, where buyers will face much more difficulties. Further increase will bring the quote to 1.2460. But if the bears break below 1.2240, pound will go straight to 1.2170, then fall to 1.2100 and 1.2030.

With regards to euro, a lot depends on 1.0600 because only its breakdown will lead to an increase to 1.0640 and 1.0680. If euro falls, it will head to 1.0480, then fall further to 1.0430, 1.0380 and 1.0320.