April 19, 2018 / 8:48 AM / 3 months ago

Sterling recovers after disappointing UK retail sales

LONDON (Reuters) - Sterling dipped on disappointing UK retail sales data on Thursday, before recovering as investors remained confident the Bank of England will hike interest rates next month.

Pound coins are seen in this photo illustration taken in Manchester, Britain September 6, 2017. REUTERS/Phil Noble/Illustration

The pound, among the best-performing G10 currencies this year, rose to a fresh post-Brexit vote high above $1.43 (1.01 pounds) this week but is now flat for the week after data showing slowing inflation encouraged investors to cut their sterling bets.

While analysts say this week’s data raise questions about the longer-term BoE rate hiking cycle, they also say the British economy has enough momentum and inflation and wage growth significantly high to justify a 25 basis point rise in May.

“Nothing has fundamentally changed this week. The data hasn’t given that added incentive for sterling to push on past those post-Brexit vote highs,” ING FX analyst Viraj Patel said.

The pound rose 0.2 percent to $1.4238 after initially falling as low as $1.4161 after British retail sales recorded their biggest quarterly fall in a year during the three months to March when unusually cold weather kept shoppers at home.

Against the euro, the pound also recovered and rose 0.2 percent to 86.975 pence.

Sterling on Wednesday posted its biggest loss in 6 weeks against the dollar after UK inflation unexpectedly cooled to a one-year low.

Most economists still expect the BoE to raise its key interest rate to 0.75 percent in May to help curb inflation.

But softer-than-expected construction and employment data this month have cast doubt on the likelihood of a second hike later in 2018.

“The May meeting could in fact be a ‘dovish hike’ whereby BoE would raise interest rates but temper market expectations,” Hamish Muress, currency analyst at OFX, said in a note.

“Sterling bulls will have to wait until February 2019 for another hike.”

The British currency has had a strong run against the dollar in recent months, in part because fears over a disorderly exit from the European Union for Britain have faded.

London last month secured an agreement that will keep close ties between Britain and the bloc for the period immediately after it formally leaves next year.

On Wednesday the U.K.’s House of Lords voted against a key part of Prime Minister Theresa May’s Brexit policy, inflicting a defeat on the government that could eventually push it toward keeping closer ties with the European Union.

Reporting by Tom Finn; Editing by Tommy Wilkes

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