Sterling steadied in afternoon trade in Europe on Thursday after a broad surge for the dollar overnight drove the British currency to its lowest in more than four months. The fall overnight had brought the pound's losses since mid-July to more than 6 cents, weighed down after a year of gains by some worse numbers on the economy and resulting doubts over the timing of a rise in interest rates.
Retail sales was the latest in a run of slightly softer data to add to the impression that one of Europe's best performing economies has peaked. The pound traded 0.1 percent weaker at $1.6582. "The effects of poor wage growth seem to be having a knock-on effect on the high street, with many families still struggling with their living expenses," said Dennis de Jong, managing director retail broker UFX.
"Consumer spending has clearly been stifled over the past couple of months and this might be a sign that the economy is starting to cool after the hot summer." Poor wage growth - average British pay is falling in real terms - has developed into the main barrier to the Bank of England making good on longstanding expectations it would raise rates either in November of this year or early next.
Bank of England minutes on Wednesday showed the first dissenting votes at a policy committee meeting earlier this month but the majority said the inflation outlook was still too weak to justify raising borrowing costs. "We still think the Bank of England will raise interest rates in November," said Michael Sneyd, a strategist with French bank BNP Paribas in London.
"There are dovish messages in the minutes yesterday, but the bottom line is that it only takes three more members of the council to vote for a rise in rates for it to happen." Sneyd and his colleagues at BNP are still in the broadly bullish camp that drove the pound some 15 percent higher in the year to July, hitting a peak of $1.7192 just over a month ago.
Investors have been trimming those bets since and Sneyd said that a positioning indicator run by BNP had halved from 43 points in July to around 20 now. He said that had encouraged him to believe there was now room for more money to swing back behind sterling, still supported by an economy that is expanding far faster than its peers in Europe. Against the euro, the pound remains far more robust. The euro hit a session high of 80.085 pence after the retail sales figures, but at 80.01 pence is still just over one full penny away from almost 2-year lows hit a month ago.