By Claire West

Following back to back monthly declines in UK retail sales the figures perked up in October revealing a rise of 0.5%, meeting the market’s expectations. The data has left the pound little changed against the euro, holding at €1.17 with the improvement broadly priced in. However, the circulating rumours of an agreed Irish bailout have lifted sterling against the dollar with the price back at $1.5950.

With the impact of the government’s spending cuts due to kick in, there are mounting fears that consumers will look to scale back purchases in order to weather the storm. However, the combination of seasonal spending and the upcoming rise in VAT appears to be keeping sales figures buoyant for the time being. As the end of the year nears we could see further improvements in retail sales numbers before the 2.50% increase in VAT takes its toll.

Duncan Higgins, senior analyst at Caxton FX says, “The figures are certainly encouraging following two consecutive months where sales volumes dropped. However, prospects heading into next year remain subdued. Seasonal adjustments aside, underlying domestic demand is going to suffer as people adjust their spending to reflect the rise in VAT and the government’s cuts. This environment is not too enticing for consumers and as sales volumes recede, first quarter economic growth could suffer.”

Higgins continues, “To a large extent the seasonal improvement in sales is already factored in and the key question will be to see how numbers hold up in the first quarter of next year. The market will need to see clear signs that the UK economy can sustain its recovery through the next few months before the pound can make a definitive move higher.”