UK retail sales in August rose by 0.5%, surpassing the expected 0.3% increase, according to the latest data from the ONS. The previous figure of a 0.6% rise has been revised down to 0.5%. Year-on-year, retail sales grew by 0.7%, slightly above the anticipated 0.6%, while the earlier figure was reduced from 1.1% to 0.8%. When excluding cars and fuel, retail sales increased by 0.8% month-on-month, compared to an expected rise of 0.7%. Previous figures were adjusted from 0.5% to 0.4%. Year-on-year, this category saw a 1.2% gain, exceeding expectations of 1.0%, with previous data revised from 1.3% to 1.0%. However, retail sales volumes fell by 0.1% over the three months leading to August, an improvement from the 0.6% decline in the three months prior, ending in July.

Pre-Pandemic Levels

Compared to pre-pandemic levels in February 2020, retail sales volumes are down by 2.1%. All categories, including food, department, non-food, and textile stores, saw slight sales increases, although this was partly offset by a drop in automotive fuel sales. Overall, despite the modest rise in August, high prices continue to impact UK consumer spending. The small increase in August retail sales provides some immediate but likely temporary support for the pound sterling. We may see short-term buying in GBP options and futures, but the downward revisions for July and the weak three-month trend suggest this strength won’t last long. Traders should be aware that rallies in GBP/USD over 1.2800 may present selling opportunities. This data adds complexity for the Bank of England, making a rate cut before the year ends less likely. The latest inflation report from earlier this month shows the consumer price index (CPI) remains sticky at 3.2%. This level of consumer activity may encourage the Monetary Policy Committee (MPC) to keep rates steady. Traders in SONIA futures should be cautious about expecting significant easing in the coming months.

Implications for FTSE 250

The implications for the FTSE 250 are mixed, suggesting that using options to trade volatility could be a wise strategy. While some consumer-facing stocks might see a slight boost, the broader market remains under pressure due to high borrowing costs. We’ve observed this trend since the interest rate hikes began in 2022, with domestically-focused companies struggling under tight credit conditions. The main takeaway is that UK consumers are not yet in a strong position, with sales volumes still 2.1% below pre-pandemic levels from February 2020. This suggests that the economic recovery is fragile and vulnerable to new shocks, a lesson learned during the energy crisis a few years back. This underlying weakness implies that any derivatives positions betting on a strong UK recovery may be premature. Create your live VT Markets account and start trading now.

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