Can the British Pound hold steady near one-month highs despite weak UK Retail Sales data?

• GBP/USD holds steady around 1.3390, having edged lower from Thursday’s one-month highs above 1.3400.
• September’s UK Retail Sales missed forecasts by a wide margin, although the August reading was revised upwards.
• Lower US yields and fading expectations of Fed monetary tightening continue to weigh on the US Dollar.

Expectations of an imminent Bank of England interest rate hike are supporting the British Pound (GBP) on Friday, leaving it broadly unchanged against the US Dollar (USD) despite weak retail consumption figures published earlier in the day. Trading around 1.3390, GBP/USD remains just below Thursday’s monthly peak of 1.3419.

A sharper-than-forecast contraction in UK Retail Sales emerged from the UK Office for National Statistics release: sales declined 0.4% in September, compared with market expectations of a 0.1% fall. The August figure, however, was revised upwards to growth of 0.7%, against the earlier estimate of a 0.5% increase.

Excluding motor and fuel sales, core Retail Sales declined 0.7% in September, a steeper fall than the -0.1% market consensus. On a year-on-year basis, both measures recorded growth of 0.8%, below their respective consensus forecasts of 1% and 1.5%.

Has Strong Inflation Firmed Up Expectations of a November BoE Rate Hike?

Among major currencies, the Pound has ranked as one of this week’s stronger performers. Expectations that the BoE will be compelled to tighten monetary policy at its 5 November meeting strengthened after Wednesday’s elevated UK Consumer Price Index (CPI) reading. The figures provided further evidence that high oil prices are exerting sustained inflationary pressure.

By contrast, the US Dollar has struggled this week as investors assume the Federal Reserve (Fed) will keep interest rates unchanged at next week’s meeting. Meanwhile, mounting fears of an AI bubble have driven investors towards the safety of US Government bonds, sending long-term US yields sharply lower and, in turn, reducing pressure on the Fed to tighten monetary policy. 

For foreign exchange markets, ING analysts expect the focus to “keep a very close watch on the short end of the US curve now.” While noting that “expectations for further Fed tightening have stayed rock-solid at around +75bp over recent weeks,” they caution that “any tech wobble that prompts a dovish re-pricing at the short end could lead to a broader Dollar correction.”