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Sterling Strengthens After Better Retail Sales

James Baxter - Sterling Strengthens After Better Retail SalesJames Baxter
Senior Currency Broker
T: 01442 892 062

The pound strengthened across the board yesterday after the publication of better than expected retail sales numbers yesterday morning. As a result, sterling rose around one cent against both the euro and the US dollar before losing most of the ground gained over the course of yesterday afternoon.

The graphs below show GBP/EUR and GBP/USD movement over the last 24 hours.

GBP/EUR exchange rate graph

GBP/USD exchange rate graph

According to figures released by the Office for National Statistics yesterday morning, sales volumes in April rose by 2.3% over the month before, rising 4% year on year. The figures were a stark contrast to those published in March, when sales fell by the biggest margin in seven years. The ONS said that anecdotal evidence from retailers suggested that the mild weather had played a significant role in boosting retail sales after the UK enjoyed one of the driest Aprils on record. As a result, the pound made significant gains against the euro and rose above $1.30 against the US dollar, to levels not seen in over 8 months.

Chief markets analyst at XTB, David Cheetham, said the better than expected data would ‘go same way to allay fears of a slowdown in consumer spending following last month’s sharp drop’. However, Keith Richardson, managing director of the retail sector at Lloyds Bank Commercial Banking, said the figures were ‘welcome news, but it’s too early to think that the tide is turning after a dismal first quarter’.

The figures provided the pound with a welcome boost after suffering heavy losses in the first part of this week. Inflation figures on Tuesday showed a sharp rise in prices following the significant weakening of the pound after the EU referendum. Sterling’s woes were then compounded on Wednesday as the publication of average earnings data showed wages were rising at a slower pace than inflation, meaning real incomes are now actually falling for the first time since 2014. There is now concern that consumers will soon start to feel the pinch, cutting back on spending, one of the main drivers of economic growth in the UK.

If inflation continues to rise at the current pace it is surely only a matter of time before the Bank of England are forced into tightening monetary policy, i.e. raising interest rates. If this coincides with a marked slowdown in consumer spending, the effect on UK economic output could be catastrophic and it is perhaps this realisation that resulted in the pound losing most of the ground that it had gained yesterday afternoon.

Emma Simpson, business correspondent at the BBC, had this to say of the current situation: ‘The squeeze on consumers is now on, with average real wages falling. And it’s not getting any easier for retailers either as they deal with the consequences of the fall in the pound and how much of the associated extra costs they’ll have to pass on to consumers’.

With continued uncertainty still dictating market movement, and the UK elections only a few weeks away, it is more important than ever to stay in touch with your account manager at FCG. If you don’t already have an account, you can register for one for free by following this link.

Today’s Data

There’s nothing significant to note from this side of the Atlantic today, nor from the States. However, retail sales figures from Canada, coupled with inflation data, will likely cause some movement in Canadian dollar crosses.

James Baxter
Senior Currency Broker
T: 01442 892 062

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