Sterling reverses gains after bleak UK retail sales

The pound reversed earlier gains and edged lower on Friday after UK retail sales data came in weaker than expected, prompting investors to price in a higher chance of an interest rate cut at the end of this month.

Sterling rose early in the day before investors resumed selling the currency in a week dominated by dismal data and dovish comments from policymakers.

A raft of Bank of England policymakers this week, including outgoing Governor Mark Carney, have signalled that a rate cut is likely unless economic data improve significantly.

Economic data showed further weakness on Friday, with British consumers failing to increase their spending in December for a record fifth month in a row. The figures suggest a bounce in consumer sentiment since Conservative Prime Minister Boris Johnson's landslide election win on Dec. 12 might not have fed through into actual spending.

"With the UK economy drifting and no sign yet of a 'Boris bounce' feeding through into consumer confidence, the lack of inflationary pressure could easily persuade the Bank of England that the time is right to inject some zip into the economy with a rate cut, and sterling is likely to recalibrate accordingly," said Ayush Ansal, chief investment officer at Crimson Black Capital.

There has been a set of torrid data this week, with weak inflation readings on Wednesday and weak growth numbers on Monday including slower industrial an manufacturing production numbers. This has raised the likelihood of a 25 basis point cut to rates in January to nearly 70%, according to Refinitiv data.

Sterling was last down 0.2% at $1.3046. The currency fell to a three-week low of $1.2955 earlier in the week before rebounding above $1.31. Against the euro, the pound was flat at 85.22 pence.

"For more than three years, sterling's position has been dictated almost entirely by Brexit sentiment, but it seems technical data is once again in the driving seat," said Sebastien Clements, currency analyst at OFX.

"If this morning's poor release becomes the trend, the Bank of England will surely look to stimulate the economy as soon as possible in order to avoid further erosion to the pound."