Sterling gains as UK retail sales beat forecasts and Burnham win eases political uncertainty

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Sterling gains as UK retail sales beat forecasts

Highlights

Sterling rises 0.25% to $1.3238 after UK May retail sales volumes beat forecasts with a 1.2% increase versus 0.5% expected and political uncertainty eases following Andy Burnham's by-election victory.
Despite Friday's rebound, sterling is down 1.2% against the dollar this week as investors assess the unchanged Bank of England rates and reduced expectations for further tightening in 2024.
Broader sterling direction remains pressured by weaker UK data, lower market expectations for Bank of England rate hikes, and comparatively more aggressive tightening by the European Central Bank.

Market move driven by data and politics

As reported by Reuters, sterling rises 0.25% against the dollar to $1.3238 after rebounding from a near three-month low in Asian trading. The pound also firms against the euro, with the single currency down 0.2% at 86.61 pence after moving away from an overnight one-month high.

Nick Rees, head of FX strategy at Monex Europe, says the move reflects a tactical bounce as Andy Burnham's by-election victory removes some uncertainty and May retail sales data offers support. Burnham wins decisively for the ruling Labour Party in a parliamentary contest in northwest England and signals he will enter any race to replace Prime Minister Keir Starmer, while Starmer says he will fight any challenge.

Official data released on Friday shows UK retail sales volumes rise 1.2% in May, ahead of economists' forecasts for a 0.5% increase. Investors are also assessing separate figures showing British government borrowing jumps by more than expected.

Rate outlook keeps pressure on sterling

Despite Friday's gains, sterling has been struggling against both the euro and the dollar and is down 1.2% against the U.S. currency this week. The currency's broader direction remains tied to shifting expectations for UK interest rates and the relative stance of major central banks.

The Bank of England leaves interest rates unchanged on Thursday, and while two of its nine policymakers vote to tighten policy, most appear some way from backing a rate increase. Softer-than-expected inflation data also leads markets to trim expectations for tightening this year, with investors now pricing in only one 25 basis point increase by year-end.

That contrasts with policy moves elsewhere. The European Central Bank raises rates last week, while the U.S. Federal Reserve holds rates steady on Wednesday but updated quarterly projections show nine of 19 policymakers still expect a rate increase this year.

Rees says he expects the pound to weaken in the coming months because Burnham's win removes the immediate uncertainty but does not resolve questions over what his leadership would mean in practice. He also says some UK data has been weak and argues market pricing for further Bank of England rate hikes is too aggressive.

In our earlier article, we covered the sharp jump in UK government borrowing in May, which came in well above forecasts and highlighted renewed strain on the public finances. We noted that record debt interest costs and higher inflation-linked spending were adding to fiscal pressure, pushing gilt yields higher and potentially limiting room for policy manoeuvre.

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