The British Pound strengthened against the Dollar and Euro after UK retail sales beat forecasts, reinforcing signs that consumer spending remains resilient.
The Pound-to-Dollar exchange rate climbed back above 1.3330, while the Pound-Euro rate rose towards 1.1710, as investors pared back expectations for near-term Bank of England rate cuts following another upside surprise in the economic data.
GBP/USD strengthened following the UK retail sales release, with Sterling recovering from early-session lows as traders responded to stronger-than-expected consumer spending data.
Sterling also gained against the Euro after the data release, extending its morning advance as markets reassessed the outlook for UK growth.
Retail sales volumes, including petrol, rose 1.0% month-on-month in June, far stronger than the 0.3% decline expected by economists. Excluding fuel, sales increased 1.1%, comfortably beating forecasts for a 0.5% fall.
In a brief to clients on Friday, Pantheon Macroeconomics noted unusually warm weather, England’s World Cup campaign and easing political uncertainty all encouraged consumers to spend more.
“Fans and football jerseys boosted retail sales, but the underlying trend remains solid.”
The consultancy acknowledged that purchases of cooling equipment and football merchandise are unlikely to be repeated in July, but argued the broader picture remains encouraging.
“Households remain willing to run down their high saving rate to maintain their spending levels in the face of higher energy costs.”
Pantheon believes June’s strong retail report means second-quarter GDP is now likely to comfortably exceed the Bank of England’s 0.1% growth forecast.
“We still look for consumer spending to ease across H2, but solid household spending looks set to place a floor under output growth.”
The details of the report highlighted the impact of the exceptionally warm June.
Clothing sales rose 1.9% as demand for football shirts increased, while online retailers enjoyed another strong month as consumers bought fans and cooling equipment.
Lloyds said the strong headline figures came with an important caveat.
“Strong volume growth in June but it looks to have been dependent on discounting.”
The bank noted repeated references by the Office for National Statistics to retailers cutting prices in order to stimulate demand.
Excluding fuel, retail price inflation slowed to 1.6% year-on-year, down from 2.1% in May and 3.0% in April.
Lloyds believes that suggests retailers are absorbing more of the recent increase in costs rather than passing them directly on to consumers.
“It looks like there is some evidence that the response to higher energy prices could be through margin compression rather than firms feeling demand is strong enough to pass-through higher costs.”
That distinction matters for the Bank of England because it implies stronger sales volumes need not translate into stronger inflation.
Pound Sterling Forecast: Strong Spending Supports Growth, But Inflation Questions Remain
The stronger-than-expected retail sales report should provide near-term support for Sterling by reinforcing expectations that the UK economy expanded more quickly than the Bank of England anticipated during the second quarter.
However, both Pantheon and Lloyds believe policymakers will also focus on the softer inflation signals beneath the headline figures.
Pantheon economists expect consumer spending to moderate later this year as inflation peaks again, while Lloyds argues widespread discounting suggests retailers are still finding it difficult to pass higher costs on to households.
For now, resilient consumers continue to provide an important cushion for the UK economy, even if the pace of spending is unlikely to be sustained through the remainder of the year.
