Sterling showed a mixed performance following stronger-than-expected retail sales and encouraging news on the UK’s public finances, which may help alleviate worries over the sustainability of government debt.
UK retail sales for January increased 1.8% year-on-year, surpassing forecasts of 0.2% and rising sharply from December’s 0.4% gain.
The figures are particularly notable given that January was an unusually wet month, which typically suppresses retail activity.
At the time of writing, the Pound was trading at 1.1439 against the Euro, just above a key support level of 1.1435, while it had slipped slightly to 1.3446 versus the US Dollar.
The strong retail sales suggest the Bank of England may not need to hurry into a rate cut, but on their own, the figures are insufficient to change expectations that the central bank could reduce rates next month amid a weakening labour market.
That helps explain the Pound’s muted reaction on Friday. Nevertheless, the data are positive, providing some stability after a volatile week and strengthening the currency’s outlook.
Interestingly, the most surprising figures of the day came from the public sector borrowing numbers rather than retail sales.
The government posted a £30 billion surplus in January, surpassing expectations of £23 billion. January typically sees a surplus due to the self-assessment tax payment deadline, Pound Sterling Live reports.
As a result, fiscal year-to-date borrowing is £8.3 billion below projections, with only February and March figures remaining.
Frequently a key driver for the Pound, the UK’s public finances were revealed to be in a significantly stronger position than anticipated in January.
For gilt market participants anticipating the Spring Statement on 3rd March, this is the more significant release. While tax receipts exceeded expectations, the bigger story was lower-than-expected government spending.
What makes the report particularly noteworthy is the impact on the cash requirement (CGNCR), a key figure that informs gilt issuance calculations. So far for 2025‑26, the CGNCR is reported to be £21.8 billion below forecasts.
Economists note that if this shortfall continues over the next two months, the 2025‑26 funding programme will have collected nearly £22 billion more than required, potentially allowing for a reduction in the 2026‑27 funding programme, all else being equal.
“Given the noise involved with monthly variations and timing effects, this is likely an over-simplified first take but it is nevertheless a market-friendly outturn in terms of future supply expectations,” according to a note by Lloyds Bank.