Pound Sterling Bid as Retail Sales Finally Give Some Good News for the Economy

Foreign exchange markets are seen bidding Pound Sterling in the wake of the release of some better-than-forecast retail sales numbers for April which have given rise to hopes the economy is entering a period of stronger growth.

The ONS reports U.K. retail sales grew 1.4% on an annualised basis in April, well ahead of market expectations for a reading of 0.1%. The monthly number read at 1.6%, more than double the consensus expectation for a reading of 0.8% to be delivered.

"Retail sales bounced back in April, as petrol and other sales recovered from the snowfall," says Rob Kent-Smith, Head of National Accounts at the ONS.

The data will go some way in convincing markets that the U.K. economy might just be about to leave behind a recent soft patch which will surely increase expectations for an interest rate at the Bank of England in August. It is the timing of this next rate rise that is key for Sterling's outlook; the closer it gets, the more support the Pound finds.

"GBP is a big outperfomer in the G10 space today," says Mark McCormick, North American Head of FX Strategy with TD Securities, "the UK retail sales print helps lift Sterling's near-term fortunes."

At the time of writing the Pound-to-Dollar exchange rate is quoted at 1.3412, having gone as low as 1.3349 today.

The Pound-to-Euro exchange rate is at 1.1425, having been as low as 1.1392 earlier in the day.

"We think that markets will be watching April retail sales a bit more closely than usual to see how much of a rebound we get after the weather disruptions in March and a soft Q1 in general," says a note from TD Securities.

The general rule-of-thumb applying here is that a beat on expectations would likely help support Sterling and a miss will likely see recent weakness extend.

The U.K. consumer forms a major part of the economy and strong retail sales tend to correlate with robust economic activity. However, the high inflation levels of recent months have dampened consumer enthusiasm, while a notable decline in unsecured credit suggests people are more inclined to save than spend.

Poor weather at the start of the year also presented a seasonal headwind to spending.

In short, if the U.K. economy is to turn around for the positive over coming months, we needed to see retail sales start improving.

However, the ONS reports longer-term trends in the sector remain subdued, "the underlying position remains subdued with the volume of goods sold over the last six months broadly unchanged," says Kent-Smith. "Increases were seen across all sectors in April, except department stores. Department stores declined following relatively strong sales last month, when their online sales were boosted during the adverse weather."

Concerning the outlook for the sector, James Smith, an economist with ING says, "UK retail sales recover but the consumer sector is not out of the woods just yet. Households remain cautious and whilst the worst of the squeeze has passed, real incomes remain under pressure."

However, Andrew Wishart, UK Economist with Capital Economics strikes a more upbeat tone:

"Looking ahead, with employment still rising at a robust pace, real wages on the up again, and consumer confidence high by past standards, we are upbeat about the outlook for consumer spending. Overall, this should help the economy to regain some pace in Q2 and further supports our view that the MPC will press ahead and hike interest rates in August."

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