Following yesterday's revelation that the UK entered a technical recession at the close of last year, today's positive retail sales data helps explain the Bank of England's (BoE) lack of concern about the GDP figures. UK retail sales experienced the most significant monthly increase in nearly three years, fostering optimism that the economy has already stabilized. While the pound showed a modestly positive response, its performance remains mixed across the board for the week.
In January, the volume of goods sold in both physical stores and online in the UK surged by 3.4%, marking the highest growth since April 2021 when the economy was emerging from lockdown. This exceeded expectations of 1.5% and aligns with recent survey findings indicating an uptick in economic momentum as the severe cost-of-living crisis, the worst in a generation, begins to ease. The positive news comes as a welcome relief for UK Prime Minister Rishi Sunak, who had to contend with yesterday's recession headlines. Although the Conservative Party has been facing mounting challenges, the likelihood of staying in power this year seems to be diminishing, especially after the opposition Labour Party overturned significant Tory majorities to secure two parliamentary seats overnight.
Surprisingly, financial markets, particularly UK assets, have shown a relatively muted reaction to these developments. This holds true for GBP/EUR, where implied volatility has dropped to its lowest level since 2007. The currency pair has experienced a slight increase, reaching €1.17, and while volatility remains low, the pound is poised to benefit from carry trades. On the other hand, GBP/USD hovers around the $1.26 mark following a modest temporary increase. Despite this, the pound is still on track for a weekly loss against the dollar, marking its fifth decline out of seven weeks, given the impact of this week's significant data releases.
