By Amanda Cooper
LONDON (Reuters) – The pound rallied by as much as 0.5% on Friday, after data showed UK consumer spending was surprisingly strong last month, offering some reassurance about the strength of the economy, although the currency was still set for its third weekly drop.
British retail sales unexpectedly rose in September, according to official data which contradicted signs that consumers were downbeat about possible tax rises ahead of the new government’s first budget later this month.
Sales volumes increased by 0.3% in September, beating economists’ expectations for a monthly 0.3% fall.
“Coming out of a period where elevated inflation led consumers to spend more but receive less, we are thankfully back on a path of seeing higher spending met with higher volumes of goods received,” Scope Markets strategist Joshua Mahony said.
“With markets still making up their mind over the likeliness of a rate cut at both November and December BoE meetings, improved spending metrics could see dovish expectations fade somewhat,” he said.
The data showed that, combined with stronger gains in July and August, sales rose by 1.9% rise in the third quarter, the joint largest increase since mid-2021.
Sterling, which rose to a session high of $1.307 earlier in the day, was last up 0.2% at $1.3037. Against the euro, the pound was up 0.1% at 86.615 pence.
It was still heading for a third weekly drop against the dollar, which has rallied over the last few weeks, as investors have grown increasingly convinced the U.S. economy is holding up well and will not need more large rate cuts to support it.
The Federal Reserve delivered a jumbo 50-basis point cut in September, but signalled no alarm about the outlook for growth, which prompted traders to reduce their bets on another similar move any time soon.
Meanwhile, the Bank of England is expected to cut UK rates at least once more this year, almost certainly in November but with a possibility of a further cut in December.
But given that inflation has proven more stubborn in Britain than in the United States, particularly in the services sector, and economic activity is not dropping off dramatically, the BoE is likely to be more cautious when it comes to lowering borrowing costs.
As such, the pound has been the best-performing major currency against the dollar so far this year, with a 2.45% gain, compared with a near-1.8% loss in the euro, or a decline of over 6% in the Japanese yen.
(Reporting by Amanda Cooper; Editing by Gareth Jones)
