The cracks are showing in the UK economy as a report on retail sales came in sharply weaker than expected. The news exposes the trouble the UK economy will face as austerity measures begin to bite and the Bank of England looks more and more likely that they will have to hike rates to quell surging inflation.

The survey comes from the Confederation of British Industry and is called the Distributive Trades Survey but what it does is ask retailers if they saw the volume of sales increase or decrease in the two weeks through February 16th. 36% answered they saw a rise in sales, while 30% said sales fell, leaving a balance of 6%. Expectations had been for a modest slowdown to +28% from +37% in January.

The report also showed that sales are expected to slow further in March with a reading of zero. The monthly poll also showed that the average retail selling prices were at their highest levels since May 1991, which only furthers the case for an interest rate hike from the BoE.

With consumers already dealing with higher VAT taxes, higher borrowing costs and higher costs to finance debt will only further crimp spending.

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The GBP responded by falling sharply against the EUR, as the EUR/GBP pair rallied above 0.85 for the first time since 2 weeks, and hit a high of 0.8560 in NY trading a 61.8% retracement of the most recent decline in this pair.

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The GBP/CHF continued its sharp decline as the concerns about higher oil prices and instability in North Africa continues to weigh on markets. We see in this daily look at we are back to test the lows we had established in late January, but the momentum with the most recent decline suggests we should push through that area and head down towards our low near the New Year. The CHF will be in demand until the situation in Libya sorts itself out which will take time, and when traders feel like unrest and protests will not spread to other important oil producers like Saudi Arabia.