Summary: Sterling reclaimed modest ground to trade slightly above $1.32 on Friday, yet remained close to a two-month low and was on track for a weekly drop of more than 1%. Strong UK retail sales for May contrasted with intensified domestic political tensions and worse-than-expected borrowing figures, leaving the pound constrained. EUR/USD traded marginally higher.
As of 08:10 ET (12:10 GMT), GBP/USD was trading 0.22% higher at 1.3234, while EUR/USD was up 0.10% at 1.1467. The pound’s modest recovery followed a release of UK retail sales data that exceeded economists’ expectations, but the gains were tempered by developments on the political and fiscal fronts.
UK retail sales volumes rose 1.2% month-on-month in May, more than double the 0.5% increase analysts had forecast. On a year-on-year basis sales climbed 3.2%, well above the 1.9% pace that had been expected. The three months to May showed a 0.4% increase compared with the three months to February, with non-food stores accounting for the bulk of the pickup.
Within the retail mix, department stores benefited from favourable weather, and computer and telecoms retailers continued a growth trend that began with product launches in March. The May increase followed a 1% decline in April, which itself was revised up from an initially reported 1.3% fall. March’s rise was also revised higher, from 0.6% to 0.7%. Retailers cited promotional activity and hot weather as the primary drivers behind the May improvement.
Despite the stronger retail numbers, sterling’s advance was limited by an intensifying domestic political focus. Greater Manchester Mayor Andy Burnham won the Makerfield by-election with 54.8% of the vote, defeating the Reform UK candidate who received 34.5%. The result, which Burnham described as a "turning point" for Labour, has strengthened his position as a potential challenger to Prime Minister Keir Starmer, with suggestions he could use the seat as the basis for a leadership bid.
Culture minister and Burnham ally Lisa Nandy said she expected the two men to speak soon. The result comes against a backdrop of internal pressure on Labour - about a quarter of Labour MPs have urged Starmer to resign since heavy local election losses last month, and there have been senior resignations including from the defence and health ministers.
Political uncertainty was compounded by new public finance figures that pointed to a faster-than-expected deterioration. Borrowing totalled 23.3 billion in May, 5.6 billion higher than the Office for Budget Responsibilitys forecast of 17.7 billion, and was 30.4% greater than the same month a year earlier. Borrowing in the financial year to date reached 46.3 billion, 7.7 billion above forecast.
Central government debt interest payable rose to 11.7 billion, the highest for any May on record, as inflation-linked gilts contributed a 4.9 billion capital uplift. Public sector net debt was provisionally estimated at 95.1% of GDP, a level last seen in the early 1960s. These fiscal trends add to potential market sensitivity around gilts and sovereign borrowing costs.
In combination, the data and political developments left sterling muted: stronger consumer spending suggested resilience in parts of the economy, notably retail, but political and fiscal pressures have the potential to influence market sentiment and direction in the near term.
Market context: The juxtaposition of upbeat retail activity and worsening public finances, along with leadership tensions within the ruling party, helped keep GBP/USD close to multi-week lows despite the better-than-expected consumer data. EUR/USD moved slightly higher in the same trading window.
What to watch next: Market participants are likely to monitor any further political moves within Labour and additional fiscal updates that could affect gilt yields and broader risk sentiment, both of which may influence the pounds path.