Pound rises on stronger-than-expected retail sales

LONDON • The sterling jumped to a one-month high against the US dollar yesterday, after British retail sales data came in much higher than expected, soothing worries about weakening consumer sentiment in Britain as it prepares to leave the European Union.

British retail sales volumes in February rose by 1.4 per cent from January, beating the 0.4 per cent increase forecast by a Reuters poll of economists and following three consecutive monthly declines.

For the three months to February, this was still the biggest slide for retail sales in nearly seven years as higher fuel prices eroded shoppers' disposable income. The Office for National Statistics said the monthly improvement was too little to offset a drag from weak demand in the previous months.

But added to comments by Bank of England (BOE) deputy governor Ben Broadbent, the numbers bolstered speculation the bank might be able to raise interest rates at least once in the next year, driving the pound half a cent higher.

It peaked at US$1.2528, its highest since Feb 24, before retreating to US$1.2505, up 0.2 per cent on the day. It was also 0.4 per cent stronger at 86.20 pence per euro.

"The concerns about the UK economy are overdone," said Mr Nick Gartside, international chief investment officer for fixed income at JPMorgan Asset Management. "You look at the CPI release on Tuesday, you look at the retail numbers today and it does feel like the Bank of England can begin to think about raising rates. Why shouldn't it?"

The sterling has lost nearly a fifth of its value since the Brexit referendum in June, contributing to a spike in domestic inflation which has further weighed on previously robust consumer spending.

A stream of recent data had suggested British consumer sentiment waning, as rising prices force Britons to spend less on non-essential items. That speaks for continued easy monetary policy. But signs that BOE will step in to support the pound with both hawkish talk and potentially a rise in official borrowing costs have instead dominated the past week's trade in the pound.

Mr Broadbent said yesterday it was possible that interest rates could rise, although he also highlighted the strong sense of caution among investors about the outlook for Britain after Brexit.

A number of major banks have warned in the past month that the sterling could fall below US$1.20 as public jousting with Brussels on the terms of Britain's departure from the EU gets going after the launch of talks next month.

ING currency strategist Viraj Patel said: "The headline (number) is great, but the actual underlying story is still weakening ... that's what matters for a policymaker."


A version of this article appeared in the print edition of The Straits Times on March 24, 2017, with the headline 'Pound rises on stronger-than-expected retail sales'. Print Edition | Subscribe