British Pound Surges on Retail Sales Blowout, 8-Month Best v Dollar, Strong Recovery v Euro

• Quotes:
• Pound to Euro exchange rate: 1.1699, up 0.67% on the day
• Pound to Dollar exchange rate: 1.3024, up 0.43% on the day
• Pound to Australian Dollar exchange rate: 1.7501, up 0.32% on the day.

Pound Sterling leapt higher against the Euro, Dollar and most other major currencies on some blowout economic statistics.

We wrote earlier in the day that were UK retail sales to come in well above expectation then Sterling might react.

This has been the case.

"Sterling woke from its slumber, and then some, following the strong April retail sales data," says Richard Berry at Berry FX. "With retail sales coming in far above the consensus, the Pound surged against both the Dollar and Euro."

The ONS reports that US retail spending grew 2.3% in April, more than double the 1.0% growth forecast by analysts.

This sends a signal to markets that the UK consumer is not as concerned about rising inflation and static wage growth as assumed.

"April’s UK retail sales figures should help to allay concerns that real consumer spending growth is slowing sharply in the face of higher inflation. After all, the volume of retail sales rebounded by a hefty monthly 2.3% after its poor performance in Q1. This was far better than the consensus forecast," says Ruth Gregory, UK Economist at Capital Economics.

Strong rebound in #UK retail sales in April (but very volatile data....) #GE2017 #Brexit pic.twitter.com/cdq2FXJnTa

— Danske Bank Research (@Danske_Research) May 18, 2017

Thus, UK economic growth should look pretty decent in the second-quarter of 2017 as the UK consumer - the engine of the economy - continues to spend with confidence.

The news is significant for the UK currency which has now breached a key level against the US Dollar and recaptured some recently-lost ground against the Euro.

"Sterling-Dollar has broken above the psychological barrier of 1.30 for the first time since 30 September after this morning's UK Retail Sales release surprised to the upside. Retail Sales jumped 2.3% in April, marking a rebound from March's 1.4% decline," says analyst Alexandra Russell-Oliver at CaxtonFX.

1.30 is an obvious psychological barrier that many with an interest in this market have been keeping an eye on for some time now and the outlook remains positive for Sterling in the near- to medium-term.

"The sellers, sensing this strength, may move away, and the liquidation of their positions alone could be enough to cause another upsurge in the GBP/USD, which could potentially happen as early as today,” says Fawad Razaqzada at Forex.com.

Forex.com have said they believe there is now potential for the GBP to rise towards 1.33 against the USD.

BerryFX note, "while it may come down slightly in the days ahead as the intoxication wanes, at the very least it is likely to settle at a higher level against both the greenback and single currency."

Pound reclaims $1.30 https://t.co/MArxQpHefa

— Financial Times (@FinancialTimes) May 18, 2017

Against the Euro we would however expect gains to be more muted owing to the Euro's ongoing comeback story.

"Sterling could remain well supported in the short term due to better than expected data flows, but downside risks are still there with reference to Brexit negotiations, which will start soon after 8 June’s general elections," says Asmara Jamaleh at Intesa Sanpaolo in Milan, Italy.

There is much potential in the Euro as markets look to a future in which the ECB withdraws its stimulus and we would expect gains in GBP/EUR to be capped.

Capital's Gregory expects the consumer to remain supportive to the economy, and thus the Pound:

"Admittedly, temporary factors, such as the unusually warm weather, probably accounted for some of April’s strength. What’s more, this week’s inflation and pay figures showing that the squeeze on real earnings growth is getting worse. However, today’s figures do at least support our view that with credit conditions remaining supportive, employment growth still-strong and consumers’ confidence robust, household spending growth is likely to slow only gradually this year rather than collapse completely."