UK retail sales rose 1.2% month-on-month in May, outpacing the 0.5% market forecast. The result points to stronger consumer spending momentum over the month.
On a relative basis, the outturn came in 0.7 percentage points above expectations, providing an upside data surprise for near-term activity indicators.
Implications For Monetary Policy And Currency Markets
We see the surprise 1.2% jump in May’s retail sales, far above the 0.5% forecast, as a clear signal of resilient UK consumer demand. This directly challenges the market’s expectation for imminent and deep interest rate cuts from the Bank of England. The strength in spending suggests underlying inflationary pressures are not fading as quickly as hoped.
This data comes when the latest inflation figures from May showed the Consumer Price Index (CPI) remaining stubbornly high at 2.9%, well above the Bank’s 2% target. Therefore, we are adding to positions that benefit from a stronger British Pound, particularly through call options on GBP/USD. The currency pair has already broken through the 1.2850 resistance level on this news, and we see a path to 1.3000 in the coming weeks.
The interest rate markets are already reacting, with the yield on the 2-year UK government Gilt rising 10 basis points to 4.55% this morning. We believe the market will continue to price out the probability of a rate cut in August, which had been seen as a near certainty. We are positioning for this by looking at derivatives that profit from higher short-term rates.
Opportunities And Risks For UK Equities
This is also a positive indicator for UK domestic stocks, which have been undervalued compared to their international peers. We are specifically looking at the FTSE 250 index, which is more exposed to the UK economy than the more global FTSE 100. Call options on ETFs tracking the FTSE 250 or specific consumer discretionary stocks appear attractive.
We must also be mindful of increased volatility, as this strong data point conflicts with the broader global narrative of a slowdown. This pattern is reminiscent of 2022, when stronger-than-expected data consistently forced central banks to maintain a more aggressive stance than the market anticipated. Consequently, we are hedging some of our bullish positions with short-term put options in case this proves to be a final burst of consumer activity before a slowdown.
