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Sterling spikes as retail sales surprise but Deutsche Bank calls for $1.06 by year end

VICTOR DE SCHWANBERG | Science Photo Library | Getty Images

Sterling jumped to its highest level in a month on Thursday following the release of February retail sales data indicating that a sharp uptick in inflation has not yet crushed the U.K. consumer.

The British currency pierced the $1.25 mark minutes after the data was released at 09:30 London time, retracing to trade slightly below that level by the end of the morning.

February retail sales in the U.K. came in 1.4 percent higher for the month, thumping consensus expectations for a 0.4 percent lift and bumping up the annual growth rate to 3.7 percent from a mere 1 percent last month.

Yet, the underlying strength of the numbers remained in question for Paul Hollingsworth, U.K. economist at Capital Economics, who noted that given three consecutive months of dropping sales volumes, a rebound this month had been eminently likely.

"What's more, it would take a very large monthly rise of over 3 percent in March to prevent sales volumes from actually falling on a quarterly basis in Q1, after a strong 1.2 percent quarterly rise in Q4," he explained.

"Indeed, with annual growth in the retail sales deflator picking up from 1.9 percent in January to 2.8 percent in February, it is unlikely that we will return to the strong rates of sales volumes growth seen in the second half of last year any time soon," he added, noting that the deflator reflected the fastest rate of inflation since March 2012.

Similarly, analysts at Barclays highlighted that the overall trend remained weaker despite strength in non-food stores and fuel boosting the headline retail sales figure.

"Overall, we believe that today's print supports our forecast of a slowdown in Q1, with GDP (gross domestic product) likely growing less than expected by the Bank of England (BOE), which would contain some of the most hawkish members on the MPC," said the research note, suggesting Thursday's data lent support to those expecting continued caution on the part of the BOE with regards to hiking interest rates.

Indeed, currency traders got a little ahead of themselves in bidding up sterling following the hawkish dissent of BOE policymaker Kristin Forbes at this month's policy decision meeting where the central bank opted to keep rates on hold at 0.25 percent, Valentin Marinov, head of G10 FX research at Crédit Agricole, told CNBC's Street Signs on Wednesday.

"Caution is still warranted - what we are seeing also at the same time is significant erosion of the real purchasing power of the U.K. consumer so real wages are falling and indeed growth there is slowing and that is continuing to weigh on domestic demand," he posited.

"Stagflation in the U.K. is a risk and it may grow from here and is not a reason to be bullish on the pound," Marinov added.

Pushing the bearish narrative on the U.K. currency even further, in a note on Thursday Deutsche Bank called for the British pound to slip by around 15 percent against both the dollar and the euro, to as low as $1.06 by the end of 2017, due to domestic growth being hit by the country's impending exit from the European Union.

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