By Claire West

Running against expectations, UK retail sales rose by 1.1% in July, far exceeding the modest 0.4% rise that the market had forecast.

It marks the largest increase since February 2010 and continues a steady uptrend of improving retail figures since April. Adding to the positive mood, data also revealed lower public borrowing in July. The public sector net borrowing figure came in at just £3.2bn, again beating the market forecast, which called for a £5.2bn. In direct response to the numbers, sterling has been given a boost across the board, rallying up from this morning’s lows.

Duncan Higgins, senior analyst at Caxton FX comments, “The retail figures are certainly encouraging in light of the government’s austerity measures. There was a lot of uncertainty about how the June Budget would affect personal finances, which could have discouraged high street spending. However the warmer July weather and significant high street discounting appears to have offset some of the doubts. Importantly, the numbers also provide a strong start to the third quarter. It raises hopes that UK economic growth will be able to near, if perhaps not match, the impressive second quarter rate of expansion.“

The positive sales data was backed up by a solid borrowing figure for July.

“In a month that traditionally shows a surplus, a £3.2bn deficit is far from ideal but it does mark a strong improvement from this time last year. With the spending review due in autumn that should outline further cuts, and the VAT rise, which will also be a solid revenue generator for the government, there are encouraging signs that borrowing will be brought back under control,” continues Higgins.

The combination of this morning’s data has resulted in a sharp move in the markets. Sterling has risen over a cent from its intra-day lows against the dollar. It also climbed by around half a percent against the euro, but is struggling to sustain gains above 1.22.

Higgins concludes, “There is clearly more confidence in the UK economy and following the figures the market may be pricing in a slimmer possibility of the BoE extending QE. Our short term forecast remains for sterling to reach its June highs of 1.24”