The pound strengthened against the US Dollar following better than expected retail sales for January.
Retail sales for January
According to the Office for National Statistics (ONS), UK retail sales rose 1.9% month-on-month in January, beating expectations for 1.0% as well as December's reading of -4.0%. Retail Sales rose 9.1% year-on-year in January, surpassing expectations for 8.7% as well as December's reading of -1.7%.
Despite the squeeze from inflation, retail sales have bounced back as consumers returned to the high street after the Omicron variant impacted the economy.
The recovery was based on increased spending at non-food stores such as household goods and garden centres. Department stores reported a monthly increase of 7.1% in sales volumes but were 8.0% below their February 2020 levels. Clothing stores reported a fall of 5.0% in January as January sales were not as generous.
As the ONS said: “Household goods stores sales volumes rose by 7.5% in January 2022 because of strong growth in furniture and lighting stores (16.6%) and electrical goods stores (16.0%). Sales volumes were 3.8% above their February 2020 levels.”
The increase of activity in January comes at a time of inflationary pressures, with the ONS reporting the highest inflation reading in 30 years. Founder of ShopAppy Dr Jackie Mulligan said: "After a truly dire December, it's encouraging that things appeared to start picking up in January. Long may it continue. However, inflation and the cost of living crisis are hitting small high street businesses from all angles. Customers have less to spend, raw materials are costing more, supply chains are being squeezed, interest rates are on the up and the cost to heat their premises is skyrocketing."
Bank of England
The Bank of England raised interest rates in February in an effort to control inflation and financial markets have priced in another rate hike in March. More than 125 basis points of rate hikes are now priced for the UK over the rest of 2022. The prospect of further interest rate hikes from the Bank of England has helped support the pound over the new year but the economic outlook is yet not clear, as inflation continues to rise.
The pound has been supported this week by the release of the jobs and wage figures which attest to the market being tight. Bank of England rate hikes are linked to higher inflation, and as long as the macroeconomic data shows a strong market then further rate hike expectations will also support Sterling.
However, some foreign exchange strategists have warned that the market is now pricing in more rate hikes from the Bank of England than they will deliver, and any disappointment could limit gains for the pound. The Bank has also been criticised for its plans to raise rates as it could endanger a struggling economy that is still fighting the effects of the pandemic and could create the conditions for a recession.
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