By Claire West

Sterling has rallied against the euro and the US dollar on the back of better than expected UK retail sales data. July retail sales came in at +1.1% much higher than the forecasted increase of +0.4%.

Phil McHugh, senior executive dealer at leading foreign exchange firm Currencies Direct, said: "The UK retail sales figures were much higher than expected and have seen the strongest gain since February. This in turn has boosted much needed confidence in sterling, triggering a rally against the euro and US dollar."

"With strong sales figures in both June and July this year, the impetus towards recovery is gaining momentum and lifting the pound. In addition we have had data from the ONS that the PSNB (Public Sector Net Borrowing) has reduced by more than expected, providing another boost for the UK economy and the pound.

"The narrowing of the deficit will help the pound gain an edge in the markets as concerns over the deficit have been a major thorn in the side of sterling."