Despite the lower than expected consumer inflation rate, Sterling should be resilient in the near term
The latest BRC retail sales survey recorded an annual like-for-like increase of 2.3% which was the highest for five months. Heavy discounting boosted sales initially and demand faded later in the month, but the data will provide some immediate relief over spending trends. The data helped provide a firm tone to Sterling in Asian trading on Tuesday, although there was still evidence of selling above the 1.95 level.
Consumer prices fell 0.7% in January and this held the annual inflation rate to 2.2% from 2.1% the previous month and compared with expectations of a 2.3% rate. The core consumer inflation rate also fell to 1.3% from 1.4% previously. The core retail prices index was higher than expected at 3.4% and there will still be underlying inflation fears.
The headline data will, however, increase speculation that the Bank of England will have greater scope to cut interest rates in the short term. This pushed Sterling weaker and will tend to undermine the currency to some extent, although there should be buying on dips.