Improved sales figures fail to boost sterling

Outpacing market forecasts of a meagre 0.1% rise, UK retail sales data, has shown a solid improvement in May, up by 0.6%.

Although the figure is marginally biased to the upside, with the World Cup boosting high street sales, it is consistent with a steady improvement in UK economic fundamentals seen in the past few months. The market reaction has again been relatively muted with data releases still failing to offset the broader market moving stories.

Duncan Higgins, senior analyst at Caxton FX comments, "The solid figures do represent improving economic conditions, but there can be little doubt that the World Cup has been an underlying cause for the boost. With Osborne due to announce harsh spending cuts and tax increases it is unsurprising that investors haven't reacted too favourably to the data."

Sterling's performance over the medium term will depend to a certain degree on the UK's performance post Budget.

"Fears are understandably in place that the economic recovery will take a severe hit from the policies set to be implemented. We will see a strong figure for June as the World Cup effect continues through, but past that, the tax increases are likely to put a cap on consumer spending. It is hard to see the economic picture improving over the medium term with consumers and businesses alike facing a lot of pressure," continues Higgins.

With attention focussed towards next week's Budget and following the latest news about BP, sterling has fallen back against the euro this morning. At present sterling is trading at €1.1950, but has found some support against the US currency, with price up half a cent on the day, just below $1.48.