The British Pound strengthened against most the Euro and US Dollar on Friday after UK retail sales rebounded far more strongly than expected in May, adding to evidence that consumer spending remains resilient despite higher energy prices and elevated borrowing costs.
According to the Office for National Statistics, UK retail sales volumes rose 1.2% month-on-month in May after falling 1.3% in April. The reading comfortably beat forecasts for a 0.5% increase.
Excluding fuel sales, retail volumes also increased 1.2%, well above expectations for a 0.3% rise and reversing April’s 0.4% decline.
The stronger-than-expected figures suggest UK households continue to spend despite concerns surrounding inflation, higher mortgage rates and geopolitical uncertainty.
According to Exchange Rates UK Research, Pound Sterling strengthened during the first hour following the release as traders interpreted the data as reducing concerns over a sharp slowdown in UK economic growth.
GBP/USD traded around 1.3196, while GBP/EUR strengthened to 1.1538, extending recent gains against the single currency.
Analysts at Pantheon Macroeconomics said the report showed that “consumer spending was holding up remarkably well” despite recent increases in energy prices.
Pantheon argued that households appear to be treating higher energy costs as a temporary shock that can be smoothed through rather than allowing it to significantly alter spending behaviour.
The consultancy also highlighted that retail sales volumes averaged 0.3% month-on-month over the March-to-May period, stronger than the 0.1% average recorded during the previous twelve months.
Strong gains were recorded in department stores, household goods retailers and online sales, with retailers reporting increased demand for seasonal products including fans and paddling pools during the recent spell of warmer weather.
Market Reaction
- Pound Sterling strengthened following the retail sales release.
- Retail sales comfortably exceeded market expectations.
- GBP/EUR moved higher after the data.
- Consumer spending continued to outperform expectations.
- Markets modestly reduced expectations of near-term Bank of England easing.
What Happens Next?
Attention now turns to UK labour-market data, inflation releases and upcoming Bank of England communications.
Pantheon said the latest figures support its expectation that UK GDP growth will hold at around 0.2% quarter-on-quarter during the second quarter, despite ongoing concerns surrounding energy prices and borrowing costs.
The consultancy cautioned that official retail sales data continue to look stronger than many business surveys suggest, raising the possibility of future revisions.
Nevertheless, the latest figures reinforce the view that UK consumers remain more resilient than many economists expected earlier this year.
Investors will continue monitoring household spending closely as consumer demand remains a key driver of both economic growth and Bank of England policy expectations.
Data Releases:
Retail Sales Ex Fuel MoM (May)
