The EUR/USD pair remained subdued near 1.0500 during the early European session on Friday, as market dynamics shifted in response to unexpected data from the UK. The Office for National Statistics (ONS) reported a surprising 1.7% month-on-month (MoM) increase in UK Retail Sales for January, significantly surpassing market expectations of a 0.3% rise. This robust retail performance provided a boost to the Pound Sterling, with the GBP/USD pair picking up fresh momentum, adding 0.07% to trade near 1.2675 at the time of writing.
The core Retail Sales, excluding auto motor fuel sales, saw an even sharper rise of 2.1% MoM, indicating a strong consumer demand rebound following December's 0.6% decline. However, on an annual basis, Retail Sales grew by a modest 1% in January compared to December's 2.8%, while core Retail Sales increased by 1.2% versus the previous 2.1%. This mixed annual performance reflects underlying challenges in sustaining consumer spending growth.
The upbeat retail data propelled the GBP/USD to its highest level in two months, trading above 1.2650 in the European session on Friday. The Pound Sterling's rally was largely attributed to the positive retail sales figures, which underscored consumer resilience in the UK economy amid ongoing global uncertainties.
Conversely, the US Dollar rebounded slightly, exerting downward pressure on the EUR/USD pair. The underlying USD bearish sentiment, however, might help limit losses for the XAU/USD pair as traders exercise caution ahead of preliminary Eurozone and US PMI reports. This cautious approach has led traders to refrain from placing fresh bets on the EUR/USD pair amid uncertain market conditions.
In addition to the strong retail sales data, the attractiveness of US repo rates and anticipated appreciation in US bills continue to influence currency markets. The competitive US interest rates present a compelling case for investors, potentially impacting currency valuations and contributing to fluctuations in trading pairs like EUR/USD and GBP/USD.
Despite the positive UK data, traders remain vigilant, considering potential shifts in market sentiment driven by upcoming economic indicators from the Eurozone and the US. These reports are expected to provide further insights into economic conditions and influence investor sentiment across multiple asset classes.