Pound Sterling Under Pressure, Retail Sales Surprise Provide Scant Relief

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The British Pound is under pressure despite an above-consensus retail sales report that shows the UK economy is well on course to exit last year's recession.

The Pound to Euro exchange rate is at 1.1656 and nursing a 0.40% loss for the week after the ONS said UK retail sales were flat at 0% month-on-month in February, down from January's 3.4% jump.

This was still above the -0.3% reading the consensus expected and should, in theory, have boosted the UK currency. The year-on-year reading was -0.4%, better than the -0.7% reading expected.

These positive data surprises are not enough to turn the Pound to Dollar exchange rate around, and it remains under pressure, adding to Thursday's 1.0% decline with a further 0.25% drop Friday.

That retail sales held ground is somewhat impressive as shoppers were once again impacted by wet weather, with this being the wettest February on record for much of the UK.

More broadly, it is clear retail sales volumes are now tracking a sideways path while the value of retail sales continues to rise, a result of the extraordinary inflation witnessed over the past two years.

Above: We are paying a lot more but taking home less than we did in the pre-pandemic years.

Retail sales show decent improvement from the final quarter of 2023 when a big decline tipped the UK economy into a technical recession.

"Retail sales volumes are on track to rebound strongly in Q1, helping the economy leave last year’s recession behind, as falling inflation boosts consumer spending power," says Rob Wood, Chief UK Economist at Pantheon Macroeconomics.

He explains that there had been a risk that retail sales would drop in February after the very strong rebound recorded the previous month and owing to the wet weather.

"February was the wettest since at least 1836 for the south of England, so retail sales holding steady was a result, especially with the ONS raising January’s growth even higher, to 3.6% month-to-month," says Wood.

He adds that if overall retail sales volumes hold flat in March, they will rise 1.7% quarter-to-quarter in Q1, the strongest since the post-lockdown surge in the summer of 2021.

But these supportive trends are not enough to prompt markets to push back against rising market expectations for an early rate cut at the Bank of England. The Bank signalled on Thursday that it would cut interest rates as soon as June.

The Bank performed a 'dovish' pivot on Thursday, as two members of the Monetary Policy Committee dropped their vote for further rate cuts. The Bank also said in a statement that it could cut interest rates and still keep monetary policy restrictive, which is shorthand for saying it thinks it can cut rates and avoid boosting inflation.

The shift in posture has undermined the Pound, which has relinquished its crown as 2024's best-performing major currency. The near-term GBP outlook swings from bullish to neutral against the Euro and potentially bearish against the U.S. dollar.