**UK Retail Sales Rebound, but Pound Slips: Forex Market Analysis**
*By Kenny Fisher, adapted from MarketPulse.com*
The foreign exchange markets witnessed notable volatility as the British pound slipped, despite an encouraging rebound in UK retail sales. The mixed signals from UK economic data and broader risk sentiment continued to affect sterling, leaving traders and investors to dissect the underlying factors influencing the currency’s near-term trajectory.
**Retail Sales Rebound Sparks Intrigue**
Friday’s retail sales figures drew considerable attention, coming in better than previously forecast. According to the Office for National Statistics, UK retail sales rose 2.9% month-on-month in May, a robust recovery from the 1.8% drop in April. Excluding auto fuel, sales also increased by 2.5%, comfortably outperforming expectations.
Key takeaways from the latest retail sales data:
– Headline retail sales climbed 2.9% month-on-month in May 2024
– Previous month (April) saw a revised fall of 1.8%
– Retail sales excluding auto fuel increased by 2.5%
– Food stores posted a notable rise of 3.3%
– Clothing and footwear sales grew by 4.7%
– Household goods store sales advanced by 6.2%
– Year-on-year, total retail sales volumes remained down by 0.2%
Consumers returned to the high street after a rainy April, aided in part by more favorable weather in May. The largest rises were seen in non-food and household goods, reflecting pent-up demand. Analysts noted that sales growth outpaced inflation for the first time since March 2022, with real household disposable incomes starting to recover.
Despite this retail bounce, caution remains. The annualized sales figure is still negative, indicating that the longer-term demand picture remains fragile. High borrowing costs and persistent inflation continue to pressure UK consumers, limiting the upside for the retail sector.
**GBP Reaction: Sterling Slips Despite Positive Data**
Ordinarily, a strong rebound in retail sales would deliver at least a short-term boost to the pound. However, in this instance, the currency drifted lower against major rivals. GBP/USD fell as low as 1.2630 in morning trading before recovering slightly.
Why did sterling slip? Several factors contributed:
– The market continues to expect the Bank of England to pursue monetary easing later in 2024. Rate cut speculation weighs on sterling, despite positive data.
– Broader risk aversion in global markets benefited the US dollar as a perceived safe-haven.
– Political uncertainty ahead of the UK general election created additional headwinds for the pound, as investors await policy clarity from the next government.
A closer look at forex reaction:
– GBP/USD dropped to its lowest levels in over a month, briefly touching 1.2630 after opening near 1.2690.
– EUR/GBP advanced modestly, reflecting some relative weakness in sterling.
– The Bank of England’s dovish tone in its latest meeting compounded investor uncertainty over the outlook for UK interest rates.
**Bank of England Holds, but Hints at Cuts**
The Bank of England’s recent policy decision and statement added complexity to the market narrative. While the central bank voted to keep its key interest rate unchanged at 5.25% for the seventh consecutive meeting, its language suggested that monetary easing is on the horizon.
Highlights from the BoE’s latest meeting:
– BoE maintained bank rate at 5.25%, as unanimously expected
– The vote breakdown shifted: 7 members voted for a hold, while 2 preferred an immediate rate cut
– Forward guidance acknowledged subsiding inflation and moderating wage growth
– BoE Governor Andrew Bailey noted that rate cuts could arrive as soon as August if data allows
The central bank outlined that it will respond if incoming economic data continues to show inflation moving towards the 2% target. While no firm date for a cut was offered, investors
Read more on GBP/USD trading.