The Pound strengthened against both the Euro and the Dollar on Friday following better-than-expected UK retail sales and a rare financial surplus recorded by the government in January.

The Pound-to-Euro exchange rate surged to 1.2080 after the Office for National Statistics (ONS) reported a 1.7% monthly rise in retail sales for January, far surpassing the anticipated 0.3% increase and recovering from December’s disappointing -0.6%.

Meanwhile, the Pound-to-Dollar exchange rate climbed to a two-month high of 1.2678 as market expectations for a Bank of England rate cut in March were scaled back. Year-on-year retail sales growth now stands at 1.0%, exceeding the expected 0.6%, Pound Sterling Live reports.

“Retail sales data for January provided some good news, showing some decent growth - well above expectations. The economy is proving to be a conundrum for policy makers at the moment. There is no doubt it could do with some stimulus, but inflation is a concern, and this data suggests the consumer is in a healthy state whilst confidence levels show the opposite,” said Neil Birrell, Chief Investment Officer at Premier Miton Investors.

However, the Pound's potential for further gains may be limited by the details within the report. Charlie Huggins, an analyst at Wealth Club, pointed out that the figures may not be as positive as they initially seem.

He explains that the recovery was mainly driven by a strong rebound in food sales. However, non-food stores experienced a 1.3% decline in sales, with clothing sales particularly weak, which he notes is “hardly a sign that consumers are feeling flush.”

“The large increase in food sales is clearly a positive for supermarkets, but it may be a worrying sign for other parts of the economy. More people eating at home is especially bad news for restaurants, pubs and bars. These sectors are in dire need of footfall, with their costs set to rise significantly in April following the Autumn Budget,” Huggins added.

Furthermore, the UK government posted a surplus of £15.442 billion in January, according to the ONS, driven by a £117.6 billion tax revenue in January 2025, which is £7.8 billion more than the same month in 2024.

This surge was primarily fuelled by a £36.2 billion rise in self-assessment taxes, marking the highest January figure ever recorded.

Yet the surplus was £5.1 billion lower than the £20.5 billion forecasted by the Office for Budget Responsibility (OBR) in October 2024. However, the current budget balance, which covers day-to-day public sector activities, remained in surplus by £24.6 billion, the highest since records began in 1997.

Furthermore, although the robust retail sales performance reflects growing wages and a strong labour market, this could change in the spring when national insurance increases and minimum wage hikes are imposed on businesses.

“We expect the Pound Sterling to remain robust short term as the UK’s rate advantage over European peers rises,” said David Alexander Meier, Economic Research analyst at Julius Baer.