Sterling today: Pound gains as UK retail sales beat and dollar cools

On Friday, the British pound strengthened as UK retail sales volumes unexpectedly increased in August, surpassing expectations and reversing a decline from the previous month. The euro also saw a slight rise, as moderating oil prices helped temper the dollar's momentum following the Federal Reserve's hawkish message. GBP/USD climbed 0.11% to 1.3373, while EUR/USD increased 0.10% to 1.1487.

Francesco Pesole, an FX strategist at ING, explained that the decline in oil prices has lessened the dollar's post-Federal Open Market Committee (FOMC) strength. Pesole pointed to recent discussions between U.S. President Donald Trump and Gulf states, which have fueled speculation about Trump's potential decision on Middle East military operations.

Despite these developments, ING does not believe they are sufficient to drive Brent crude below $100 per barrel. The Federal Reserve's recent hawkish stance has signaled markets to fully anticipate a potential October interest rate hike if data and energy prices align. ING anticipates that off-meeting remarks from Federal Open Market Committee (FOMC) members will carry more weight than the dot plot, which already indicated a continued interest rate hike for the year.

Friday's U.S. industrial production and leading index prints for August are expected to have minimal impact on markets, as the month nears its end and the calendar thins further. Oil remains the primary near-term driver for markets. British retail sales volumes rose by 0.5% in August, beating forecasts for a 0.2% decline and recovering from a July slump tied to prior promotional activity.

Department stores bounced back from stock availability issues, while non-store retailers rebounded from a July slump. Sales volumes were 2.4% higher than a year earlier and hit their second-highest level since April 2022, just below the June 2026 peak. Over the three months to August, volumes increased by 0.9% compared to the same period in May.

Online sales values rose by 2.5% month-over-month, recovering from a 4.2% drop in July and being 8.9% higher year-on-year, with online sales accounting for 28.8% of total retail sales, up from 28.4%. However, fuel volumes fell as prices rose sharply due to changing consumer habits, with motorists only partially filling their tanks.

Total spending, which combines in-store and online sales, grew by 1.3% on the month. ING maintains that today's sterling move is primarily driven by dollar movements rather than a direct reaction to the retail data. ECB policymakers recently adopted a hawkish tone, with Gabriel Makhlouf keeping an October rate hike option open and Ante Zigman emphasizing the need to bring inflation under control.

Olli Rehn's more neutral stance weakened the dovish camp. Later this week, ECB President Lagarde will provide further insights, but ING believes there is limited potential for new signals, with a test of 1.140 for EUR/USD as the near-term risk for the euro. ING sees downside risks for EUR/USD and upside risks for USD/JPY, contingent on oil remaining elevated and an October Federal Reserve rate hike; a softer oil path or a dovish Fed pivot could alter this outlook.