LONDON: Sterling rallied while gilts fell on Friday after British retailers reported their fastest sales growth in more than nine years, adding weight to the view that a resurgent UK economy may bring forward an interest rate rise.
The pound, which has been weak since the start of the year, was up 0.5 percent to $1.6439, having traded at $1.6344 before the data.
The euro was 0.7 percent lower at 82.68 pence. British retail sales jumped by 2.6 percent in December to show a 5.3 percent annual rise in volumes.
That was the fastest growth since October 2004, official data showed on Friday.
The pound had been sitting close to a one-month low after Tuesday's weaker than forecast inflation data brought inflation in line with the Bank of England's target for the first time in more than four years. But Friday's much stronger than forecast retail sales number has led markets to price in the possibility of a rise in interest rates in a year's time.
All eyes are now on how the Bank of England will react to the data and whether it will lower the 7 percent unemployment threshold at which it will start to consider raising rates.
"It's a big number," said Nawaz Ali, UK market analyst at Western Union, referring to the retail data.
"The Bank of England needs to keep a handle on predictions of high borrowing rates.
"If we continue to see market reaction like this, then certainly in the first quarter or the next couple of months we'll see some kind of response." UK gilt futures fell to a session low of 108.62 after the data, coming off a seven-week high of 109.12. They were last down 18 ticks on the day at 108.76.
Ten-year British government bond yields rose two basis points to 2.84 percent, pushing the premium it offers over the German equivalent four basis points wider on the day to 107 basis points.
"Investors are currently in position reduction mode, so I would expect only limited (sterling) gains from here," said Neil Jones, head of hedge fund FX sales at Mizuho.
"However, improved domestic confidence expectations are a key pillar behind our long-term bullish sterling forecast."
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