News & analysis

Sterling has dipped from session highs after headline and core retail sales figures for January undershot expectations substantially this morning, evidencing the toll January’s lockdown has had on the UK economy.

Headline retail sales volumes contracted by 8.2% MoM vs expectations of -3.0%, with the core reading falling 8.8% vs expectations of -2.1% MoM. All sectors saw monthly declines in volume sales in January, except for non-store retailers and food stores – those that are best adapted to lockdown conditions or deemed essential enough to remain open for business – while the share of retail sales recorded online rose from 29.6% to 35.2%.

Sterling is looking through today’s slip in data for two reasons…

  • Firstly, the UK economy has evidenced that the national lockdown’s hit to economic activity is substantially less than back in Spring, with retail sales volumes just 5.5% lower than before the pandemic in February 2020. This compares with the collapse in consumption that occurred in April 2020, when retail sales volumes fell by 22%. This latest data point adds to the theme witnessed in January’s data thus far; that the UK economy, especially the services and retailing sector, is much better adapted to tighter lockdown conditions this time around.
  • Secondly, FX markets are forward-looking. Monday’s announcement from Boris Johnson suggests that the current economic headwinds shouldn’t linger for too long. With vaccination levels on track to achieve the government’s targets and the number of new cases declining to October’s levels, constraints around the economy should begin to be lifted in the coming months, rendering the contraction in retail sales seen in January temporary.

However, the risks surrounding PM Johnson’s roadmap to recovery are tilted to the downside for sterling. This is largely due to the price the pound finds itself trading at as it sits near a one-year high against the euro and just shy of the $1.40 mark against the dollar. Should the conditions around the reopening of the UK economy push back expectations of the speed of the economic rebound, and be coupled with no additional far reaching fiscal support in March’s budget, the pound may be setting itself up for disappointment at current levels.


Sterling is unfazed by the slip in January’s retail sales data as it continues to trade with high expectations of Johnson’s speech on Monday


Author: Simon Harvey, Senior FX Market Analyst



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