The Pound sterling continued to make notable gains on Friday, with the GBP/USD pair rising 0.27% during the European session to reach 1.3046.
UK Retail Sales Boost Impact on the Pound
UK retail sales saw notable growth for the third consecutive month in September, rising by 0.3% on a monthly basis. Although this was lower than the 1% increase recorded in August, it was better than market expectations of a -0.3% decline. On an annual basis, sales rose by 3.9%, compared to 2.3% in August, and above expectations of 3.2%, marking the highest annual growth rate since February 2022.
This positive retail sales performance is good news for the government, especially with Chancellor Richard Reeves set to deliver the annual budget on October 30. However, Reeves warned that the budget will include tough measures such as spending cuts and tax increases, which could restrict consumer spending, especially as they cut back on luxury items.
Strong US Retail Sales
In the US, retail sales performed strongly in September, supported by lower gasoline prices, rising 0.4%, beating expectations for a 0.3% increase, and compared to August’s gain of 0.1%. However, retail sales fell on an annual basis to 1.7%, compared to a 2.2% gain in August, but it was higher than the 1.6% forecast.
The strong data comes as a positive sign that economic growth in the third quarter was strong, supporting the possibility of the Federal Reserve cutting interest rates by a quarter percentage point in November and December. Although the bank cut interest rates by 50 basis points in September, this cut is expected to be an exceptional move unless there is a sudden deterioration in economic data. This directly affected the GBP/USD pair.
Pound sterling/US dollar: Positive data supports performance
The GBP/USD pair continued to rise during early trading on Friday, advancing to the 1.3050 level. After the pair closed its trading on Thursday in the positive territory, ignoring the continued strength of the US dollar, and with the absence of influential economic data, the state of risk appetite could play an important role in determining the pair’s trends before the end of the week.
The pair witnessed a noticeable recovery on Thursday after the significant decline it suffered on Wednesday, as the pound managed to attract capital outflows from the euro, despite the stability of the US dollar against most major currencies. This indicates the continued demand for the pound in the face of challenges.
In the same context, data released on Friday morning from the British Office for National Statistics showed that retail sales rose by 0.3% on a monthly basis in September, which was better than the market expectations of a decline of 0.3%. This positive data provided additional support to the pound, especially after the remarkable growth in August by 1%. These figures indicate the relative strength of the British economy in light of complex global economic conditions, which enhances the chances of the Pound sterling continuing its positive performance.
On the other hand, strong economic data from China indicated an improvement in global market sentiment, positively reflecting in Asian stock indices. In addition, US stock index futures rose during Friday’s trading by a rate ranging between 0.1% and 0.4%. If Wall Street indices continue to rise after the opening bell, the US dollar may come under additional selling pressure, which enhances the chances of the GBP/USD pair rising.
GBP/EUR rises after ECB rate cut
The GBP/EUR exchange rate rose significantly on Friday, as the European Central Bank announced its third interest rate cut of 2024. GBP/EUR was trading at €1.2030, up 0.5% on the day.
Interest rate decisions and expectations from the Bank of England and the European Central Bank remain key factors influencing the Pound sterling, with markets monitoring geopolitical developments. The focus is currently on the ECB, which is expected to announce its first rate cut in 13 years.
Expectations suggest another cut in December, as well as a series of cuts next year. MUFG expects interest rates to fall to or just below 2.00% by next year, creating a headwind for any dovish policy surprises from the ECB.
While ING’s forecast suggests the ECB will find a case for a rate cut this week without disrupting markets, there are doubts about the need for further cuts in December. Geopolitical risks and their potential impact on energy prices could make the ECB more cautious in giving any hints about further easing. The ECB has been increasingly concerned about the growth outlook, but remains reluctant to take bold steps on inflation.
With expectations of two more rate cuts by the Bank of England by the end of 2024, Paul Dales, chief economist at Capital Economics, agrees that a November rate cut is likely. He notes that the odds of another 25bp cut at the next meeting in December have also risen. A A rate cut is expected to support sterling. The outlook for fiscal and monetary policy in 2025 will be crucial, especially as markets continue to digest Wednesday’s UK inflation data.
