Sterling Rises with Upbeat Retail Sales

The Pound Sterling (GBP) is gaining strength following the release of upbeat United Kingdom Retail Sales data. Consumer spending growth in June exceeded expectations, with Monthly Retail Sales expanding by 0.7% compared to the anticipated 0.2%. Additionally, annual consumer spending data contracted by 1.0%, surpassing the consensus of -1.5%.

Despite facing challenges such as higher inflation and interest rates set by the Bank of England (BoE), the United Kingdom’s consumer spending remained resilient in June. The positive retail demand has counterbalanced concerns related to soft inflation data for June, as increased consumer spending may enable firms to raise prices of goods and services at factory gates once more. Moreover, the strength in consumer spending raises the possibility of a 50-basis-point interest rate hike by the UK central bank.

The market sentiment surrounding the pace of interest rate hikes by the Bank of England on August 3 remains mixed. Initially, investors anticipated consecutive 50 basis points (bps) rate hikes, but with June’s inflation showing a significant cool down, some are now leaning towards a 25 bps rate increase. The investing community expects that interest rates by the BoE will peak at around 6.5%.

BoE Deputy Governor Dave Ramsden acknowledged that inflation has started to decline significantly in the UK, although he believes it is still “much too high.” Market participants are confident that UK inflation is cooling down due to the aggressive policy tightening by the BoE and the decline in the Producer Price Index (PPI), which together are combating price pressures. Producers have also cut prices for the first time in more than three years and are passing on the benefit of the decline in cost pressures to end consumers, according to a survey from Lloyds Bank.

Looking ahead, investors will be closely monitoring the S&P Manufacturing & Services PMI for June, scheduled for publication on Monday at 08:30 GMT. The overall market mood is cautious as the second-quarter earnings season has begun.

Meanwhile, the US Dollar Index (DXY) is gaining strength, aiming to breach the crucial resistance level of 101.00. Consumer spending in the US has remained strong, and core inflation is expected to take some time before returning to 2%. Investors are eagerly awaiting the interest rate decision by the Federal Reserve (Fed), set to be announced on July 26. As per the CME FedWatch tool, interest rates are expected to be increased by 25 bps to 5.25-5.50%. Investors hope that this will be the final interest rate hike for the year.