FX round-up: Sterling rises on hearty UK retail sales as inflation, possible BoE rate rise lurk

Sterling ticked higher on most major crosses Thursday thanks to better-than-expected UK retail sales figures for February, with rising inflation and a possible Bank of England (BoE) interest rate hike lurking in the background.

At about 17:06 GMT, sterling was up 0.35% to $1.2529 and up 0.44% to €1.1614. It also firmed versus the aussie, loonie, kiwi and yen, but fell against a rand on improving local economic data.

"Sterling popped up 0.3% to trade at a 1-month high above $1.25 after February’s retail sales beat expectations," said Neil Wilson, senior market analyst at ETX Captial.

Earlier on Thursday, Office for National Statistics revealed UK retail sales excluding auto fuel bounced back 1.3% in February, after January's revised 0.3% fall and well above views for a 0.3% rise.

"The data," opined Wilson, "only confirms consumer spending is facing some significant headwinds in the year ahead".

He was concerned by the quarter-on-quarter UK retail sales, and rising inflation, which has recently popped up above the BoE's targeted rate of 2%. "Inflation is likely to overshoot the Bank of England’s 2% target for much of this year."

Against this fabric, Laith Khalaf, senior analyst at Hargreaves Lansdown, said the odds of a BoE interest rate rise versus it being held steady were almost evenly split, noting a string of recent data had pushed sterling up.

He cited the retail sales data, the higher than expected inflation, and an 8-1 split vote from the BoE Monetary Policy Committee.

"Markets are now pricing in a 42% chance of a rate rise this year, compared to just 10% a month ago," said Khalaf, also noting the normalising monetary policy in the US.

FXTM research analyst Lukman Otunuga said with Article 50 set to be triggered next week, sterling could be in store for a messy roller-coaster ride.

"The lingering concerns over complications arising in the negotiation process may compound to the jitters consequently exposing Sterling to downside risks."

Turning to the US, the dollar managed mostly muted gains against the euro, aussie, loonie and kiwi, but fell against the rand's strength and defensive-play yen.

"King Dollar was on the back foot this week with the dollar index struggling to break back above 100.00 as sellers exploited the renewed Trump jitters to attack prices incessantly," said Otunuga.

He said dollar bulls remained on the prowl for inspiration to pump life into the greenback with (Fed chair Janet) Yellen's speech today at a Community Development Conference seen as an opportunity.

"If Yellen dishes a hawkish surprise or any fresh insights on rate hike timings, then bulls could be encouraged to elevate the dollar index back towards the psychological $100.00 level."

On the other hand, he assessed, if bulls were left empty handed then the dollar could be "in store for further punishment in the short term."