Retail Sales Surge Offers Scant Support to Pound Sterling

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The British Pound could not find lasting support from stronger-than-expected UK retail sales data that adds to evidence that the economy will exit recession this quarter.

The Pound to Euro exchange rate rose to 1.1698 after the ONS reported retail sales rose 3.2% month-on-month in January, beating expectations for a more modest 1.7% figure, in what amounts to a significant improvement on December's -3.5% reading.

Retail sales recovered to 0.7% year-on-year in January, from -2.4% in December, and beat expectations for -1.4%.

However, Pound Sterling's gains soon faded, with Pound-Euro retreating to 1.1680, taking the week's loss to 0.20%. The Pound to Dollar exchange rate rose to 1.2590 in the wake of the numbers and then slid to 1.2580. 

The currency market appears more reactive to any GBP-negative news at present (this week's inflation and GDP reports), suggesting the balance of risks is tilted to the downside as investors cut back positions following the strong performance of the Pound in 2024.

The retail sales nevertheless signal the economy started 2024 on a stronger footing and this can limit downside in the currency.

"There was promising news as sales volumes rose for the second time in three months, following 19 prior months of decline. This reflected rising levels of consumer confidence, as well as a boost from the January sales," says Kris Hamer, Director of Insight at the British Retail Consortium.

Charlie Huggins, Manager of the Quality Shares Portfolio at Wealth Club, says UK consumer spending is proving highly volatile from one month to the next.

"The December figures suggested signs of pressure, whereas January's figures indicate the UK consumer is still in rude health," he explains, "the reality is probably somewhere in between."

The above shows consumers spent more for less in January 2024, as the 3.9% monthly rise in sales values (the amount spent) exceeded the 3.4% rise in sales volumes.

But the chart also shows the December slump was a blip that has apparently been corrected.

Recall that the December figures caused a selloff in the Pound, convincing one member of the Bank of England's Monetary Policy Committee - Swati Dhingra - to vote to cut interest rates as she said the fall was evidence of slumping demand.

Sterling bulls might feel aggrieved that there is no stronger recovery in the Pound in response to January's strong retail figures, given it now appears the market overreacted to December's slump.

Neil Birrell, Chief Investment Officer at Premier Miton Investors, says the consumer sector bounced back strongly after a weak Christmas period and these numbers suggest that ongoing higher interest rates are not having the dampening effect that was anticipated.

"The Bank of England will tread a careful path in its decision making as these numbers do not provide them with much clarity," he says.