The British pound climbed above $1.347, approaching its highest level since February 2022, lifted by upbeat economic data and relief on the cost-of-living front.
Sterling approaches three-year high
Retail sales in April jumped by a more-than-expected 1.2% month-on-month, marking the fourth straight monthly gain and signaling continued resilience in consumer spending despite tax hikes and global trade tensions driven by US tariff policies. The strong retail figures were underpinned by broad-based gains across most sectors, including clothing, home goods, and food, reflecting a cautiously optimistic consumer outlook.
Meanwhile, consumer confidence rebounded in May, with households showing greater optimism about personal finances and a higher willingness to spend on large purchases. This improvement comes amid signs that wage growth is gradually outpacing inflation, offering some relief to real incomes. The GfK consumer confidence index rose to its highest level since early 2023, indicating that the psychological drag of the cost-of-living crisis may be starting to ease.
Ofgem announced a 7% cut to the energy price cap
Adding to the positive mood, Ofgem announced a 7% cut to the energy price cap starting in July, easing household pressure after multiple previous increases. The reduction is expected to lower average annual energy bills by several hundred pounds, freeing up disposable income and potentially reinforcing consumer spending momentum in the second half of the year. This policy shift follows a sustained drop in wholesale energy prices and is seen as a key turning point in the broader inflation narrative.
Still, inflation remains sticky, climbing to 3.5% in April—above forecasts and well above the Bank of England’s 2% target. The persistence of elevated price growth, particularly in services and housing, complicates the central bank’s path forward. Markets are currently pricing in a 50% chance of a Bank of England rate cut by August and possibly another by year-end, though the decision will likely hinge on upcoming wage and inflation data. Despite lingering inflationary pressures, the pound’s recent strength reflects investor confidence in the UK economy's relative resilience and improving domestic fundamentals.
