Sterling draws strength from UK retail sales

By Amanda Cooper

GDANSK (Reuters) -The pound briefly rose on Friday after data showed UK retail sales were surprisingly strong in February, offering some optimism about the resilience of the consumer, while the broader economy barely grew in the fourth quarter.

British retail sales unexpectedly rose in February, growing 1.0% from January, figures from the Office for National Statistics showed on Friday. Reuters poll of economists had pointed to a monthly fall of 0.4% in sales volumes.

This marked the second straight monthly increase in retail sales, after a dismal reading in December, the key month for holiday shopping.

Sterling rose to a session high of $1.297 after the data, before retreating to $1.295, roughly flat on the day. The euro was last down 0.25% against the pound at 83.20.

The derivatives market shows traders are placing roughly a 50% chance on the Bank of England cutting rates at its May meeting, and Friday's retail sales data did little to shift this expectation.

This week has been turbulent for sterling. On the one hand, the pound has been caught up in the volatility that has affected global markets after U.S. President Donald Trump on Wednesday announced a blanket 25% tariff on all imported cars into the United States, further stoking fears of a full-on trade war.

The U.S. government is expected to release its full suite of trade policies on April 2, including details on tariffs.

On the other hand, UK finance minister Rachel Reeves this week unveiled her budget plans, in which she announced spending cuts, while the UK's Debt Management Office said it would issue fewer bonds than expected this year and next.

"Wounds run deep in FX markets and the build-up to (Reeves') Spring Statement was dominated by tough decisions that the chancellor would need to make. In the end, bond vigilantes and the "glass half empty" brigade were left disappointed," Bank of America strategists Kamal Sharma and Sonali Punhani said in a note on Friday.

"Where from here? Immediate focus turns to the tariff announcement on April 2nd and positive seasonality through next month," they said, referring to the pound's tendency to perform well in the month of April, when the new fiscal year begins.

A separate data release on Friday showed the UK economy expanded 0.1% in the fourth quarter, as economists polled by Reuters had expected. On an annual basis, growth expanded by 1.5%, compared with forecasts for an increase of 1.4%.

(Reporting by Amanda Cooper; Editing by Alun John and Shinjini Ganguli)