UK retail sales experienced a modest 1% increase on a like-for-like basis compared to the previous year, showing a slowdown from January's 1.4% gain and falling short of the anticipated 1.5% growth. This subdued performance was attributed to adverse weather conditions and persistent cost-of-living pressures, resulting in the lowest figure since August 2022. The GBP/USD exchange rate retreated from the $1.27 level in anticipation of a significant week of data and events that had the potential to impact the markets.

Amidst stability in financial markets, investors have been willing to embrace higher risks in pursuit of greater returns. Equities have been consistently reaching record highs, and Bitcoin has surged by 60% in just a month. Despite the attractiveness of the higher-yielding pound, reflected in a net increase of $3.7 billion in bets on GBP, the GBP/USD spot rate has displayed a narrow sideways movement since the beginning of the year, trailing behind global equity indices.

While the pound has only marginally benefited from the prevailing low volatility and risk appetite, the implied volatility of GBP/USD has reached levels not seen since early 2020, before the pandemic. GBP/EUR implied volatility, on the other hand, has hit 17-year lows. With expectations that the Bank of England (BoE) will implement fewer rate cuts compared to its counterparts in the coming years, the pound maintains an attractive yield profile relative to other currencies. However, the excessive long GBP positions may constrain its upside potential.

The market sentiment is subject to rapid changes, and potential tax cuts announced by the UK Chancellor tomorrow could exert upward pressure on yields, already near 15-year highs. This may provide added motivation for the BoE to prolong its decision to hold interest rates, a move that could prove beneficial for the sterling.