Pound Sterling Today: Retail Sales, PMIs and Politics

Image © Pound Sterling Live

The British pound welcomes some improved domestic data ahead of the weekend.

UK retail businesses reported sales rose 0.4% m/m in December, which was better than the -0.1% the market was predicting would transpire.

The annual figure for retail sales meanwhile rose by a comfortable 2.5% y/y, more than double the consensus bet of 1.0%.

The pound ticked higher on the data: the pound to dollar rate went to 1.3496 from 1.3480; so not a massive move but a knee-jerk reaction was noted nevertheless.

The pound to euro exchange rate rose to 1.1490 from 1.1483.

These data will shore up pound sterling to the extent that it signals there's enough demand in the economy to convince the Bank of England to forgo an interest rate cut in February.

With interest rate expectations steady, the pound can look to form a base against the euro following a torrid weak.

📍 Breaking: PMIs beat expectations, pound extends rally.

Politics is now also firmly back on the agenda for the pound, with traders in the City of London reporting Thursday that there was a distinct reaction to news a route to Parliament had been made available to Andy Burnham.

Burnham, the current mayor of Greater Manchester, is considered a standard-bearer for those members of the Labour Party wanting to challenge Prime Minister Keir Starmer.

The resignation of Labour MP Andrew Gwynne from his Manchester seat is considered a perfect opportunity for Burnham to run.

Burnham advocates borrowing more money to spend on projects he deems important, most notably social housing. With the UK's debt pile already under scrutiny, markets are uncomfortable with the prospect of a Burnham leadership.

One trader told Sky News:

"The Burnham angle to the Gwynne story was very interesting for markets as we saw a sudden sell-off in GBP and gilts. Nothing huge in real terms but it certainly confirmed how the market would react to Burnham potentially having a pathway into Parliament and then putting in a leadership challenge.

"The underlying political risk view for markets is that as bad as Starmer and Reeves may be, there's potentially something worse waiting in the wings, of which Burnham is but one."

However, there is a roadblock to Burnham in the form of Labour's NEC, the body that oversees the running of the party.

The party changed its rulebook this year to say mayors would need express permission from the NEC to stand down and run for Parliament. It's almost as if the rules were changed in anticipation of Burnham's moves.

So, this formidable challenge could yet keep market anxieties at bay for now.

2026 will still be a year in which politics pose headwinds for the pound, with May's local elections likely to see Labour receive a drubbing. It will prove an opportune moment for Labour's plotters to strike.

The inevitable leftward drift this poses will not be welcomed by markets.