Sterling remains weak despite good Retail Sales

20th May 2011
Good morning. Better than expected Retail Sales yesterday boosted Sterling, and it rose against the Euro and US Dollar. Gains were short lived however, as it did not change things fundamentally and UK growth prospects still looked patchy and consumer confidence fragile. Rates at 08:30am this morning are as follows:
Retail Sales better than expected

UK retail sales rose by more than expected in April, boosted by the extra public holiday for the royal wedding, and the warm weather. Sales last month were 1.1% higher than March, said the Office for National Statistics.

Demand rose most for clothing, footwear and food products. However, economists warn the big rise in sales is likely to be a one-off, and that consumer spending remains muted. A separate report by the CBI business organisation said that growth in British factory orders had accelerated more than expected in May.

What do the analysts say?

Analysts don't expect this to give the Pound any significant boost however. Howard Archer, chief UK and European economist at IHS Global Insight, also said the April figures should be treated with caution.

"While welcome, we strongly doubt that the 1.1% jump in retail sales volumes in April is a sign that the consumer is roaring back to life," he said.

Interest Rate hike still some way off

The data also did little to change expectations of interest rate hike. Financial markets only fully price in a quarter percentage point interest rate rise in the UK by January next year, having cut back expectations for at least three 25 basis points rate hikes in 2011 that had been factored in earlier this year.

In contrast, investors are pricing in at least two further quarter percentage point rate increases by the European Central Bank. Despite Greece's debt problems, investors are of the view the ECB will keep raising rates as it seeks to fight off inflationary pressures.

Summary

It's the same story of interest rates driving exchange rates. As the UK is unlikely to raise rates this year, while the EU are likely to push their rate up at least twice more, it's likely the Euro may well remain stronger than Sterling, stifling any gains caused by good economic data.

Today's Data

We end the week with Inflation data from Germany, the largest economy from within the EU. Other than that the only other data of note is from Canada: Retail Sales and inflation data

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