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UK rate cut bets jump as retail sales unexpectedly decline; pound drops

U.K. retail sales volume registered an unexpected third consecutive monthly decline in December 2019, adding to the recent weak economic data that fueled expectations of an interest rate cut by the Bank of England ahead of its upcoming monetary policy meeting.

Retail sales fell 0.6% month over month in December 2019, following a revised 0.8% fall in the previous month, data from the Office for National Statistics showed. The consensus estimate of economists polled by Econoday was for sales volume to expand 0.6%.

The pound fell 0.2% to $1.3048 around 8 a.m. ET. Markets are now pricing in a 72% probability of a rate cut in the Bank of England's Jan. 30 monetary policy decision, compared to a 28% likelihood of policy easing from Jan. 10, according to the BoE watch tool of the CME Group.

Sales at food stores slipped 1.3%, the largest drop in three years. Sales at textile, clothing and footwear stores fell 2.0%, and sales at department stores declined 1.8%. Meanwhile, non-store retailing and fuel store sales gained 1.0% and 1.6%, respectively.

In value terms, retail sales contracted 0.3% in December 2019.

On an annual basis, retail sales volume advanced 0.9% in December 2019, missing market expectations of a 2.7% expansion, while sales value rose 1.5%. Non-store retailing and fuel store sales drove the year-over-year expansion.

Online sales climbed 5.6% on an annual basis and increased 1.6% on a monthly basis.

Market expectations for an interest rate cut by the BoE increased earlier this week following dovish comments from some central bank officials, a surprise contraction in the U.K.'s GDP in November 2019, and a weak inflation reading for December 2019.

But markets may have overreacted and missed the details of the recent economic reports, according to a note from Andrew Goodwin, chief U.K. economist of Oxford Economics. "The downside surprises for GDP and inflation were heavily influenced by temporary factors," Goodwin wrote, putting the chances of a January rate cut at 25%.

In addition, the dovish comments by BoE policymakers also merely reiterate the message set out in the minutes of recent meetings of the central bank, Goodwin said.

BoE policymaker Gertjan Vlieghe told the Financial Times that he would support an interest rate cut at the upcoming monetary policy meeting, if the U.K. economy does not bounce back. Another monetary policy committee member, Silvana Tenreyro, also said that she may back a rate cut amid continued uncertainty over the U.K.'s post-Brexit relationship with the EU.

Outgoing BoE Governor Mark Carney had signaled that the central bank could pursue more stimulus measures to spur domestic growth. He said the U.K.'s economic expansion is expected to pick up from its current below-potential rates, helped by reduced Brexit uncertainties, easing fiscal policy and a modest recovery in global growth.