British Pound holds near one-month highs despite weak UK Retail Sales figures

• Near 1.3390, GBP/USD holds steady after easing from Thursday’s one-month highs above 1.3400.
• September UK Retail Sales undershot forecasts by a wide margin, although the August figures were revised upwards.
• Falling US yields and fading expectations of Fed monetary tightening keep the US Dollar under pressure.

Weak retail spending figures released earlier on Friday have prompted little reaction in the British Pound (GBP), which is virtually unchanged against the US Dollar (USD). Expectations of an imminent interest rate increase by the Bank of England are supporting GBP/USD near 1.3390, slightly below Thursday’s monthly high of 1.3419.

Figures from the UK Office for National Statistics showed a 0.4% fall in UK Retail Sales in September, a considerably steeper decline than the 0.1% anticipated by markets. By contrast, August’s growth was revised upwards to 0.7%, from the initial estimate of a 0.5% increase.

Excluding motor and fuel sales, core Retail Sales declined 0.7% in September, also weaker than the market consensus of -0.1%. On a year-on-year basis, both measures rose 0.8%, falling short of their respective consensus forecasts of 1% and 1.5%.

Strong inflation figures reinforce expectations of a November BoE rate rise

Wednesday’s strong UK Consumer Price Index (CPI) release provided further evidence that high Oil prices are exerting sustained inflationary pressure. It also strengthened expectations that the BoE will be forced to tighten monetary policy at its 5 November meeting. Against this backdrop, the Pound has ranked among the stronger major currencies this week.

In contrast, expectations that the Federal Reserve (Fed) will keep interest rates unchanged at next week’s meeting have left the US Dollar under pressure this week. Meanwhile, mounting fears of an AI bubble have driven investors towards the safety of US Government bonds, pushing long-term US yields sharply lower. This has, in turn, reduced the pressure on the Fed to tighten monetary policy. 

Foreign exchange markets are expected to “keep a very close watch on the short end of the US curve now.” according to analysts at ING. 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."