Pound rally but it’s still bleak on the High Street

Sterling was up 0.74 cents against the European single currency, to 1.0684 euro, making one euro worth 93.6p. It was also up 1.42 cents to $1.4082 against the greenback, having fallen to $1.35 on Friday — its weakest since September 1985.

The rally came despite the bleakest forecast from the High Street in 25 years after nearly two-thirds of retailers saw business decline on a year ago in the New Year sales.

It raised fears the recession could be deeper and longer than expected. But currency traders were betting the pound has been oversold in recent weeks and analysts at BNP Paribas argued that sterling's next stop could be $1.46.

This followed assurances yesterday from Barclays that it did not need a Government bailout, which would have put the UK's fragile finances under even greater strain. Barclays shares jumped 73% yesterday and were up another 5%, or 4.3p, to 93p today.

"The fact that sterling is benefiting from the banking news suggests it may not be the lost cause many seem to assume it is right now," said Steve Barrow, head of G10 currency research at Standard Bank. BNP analysts added that the downturn in the UK is unlikely to be as bad as that in the eurozone.

However, others said that, despite sterling's gains, its broad downward trend would continue due to weakness in the UK economy and the prospect of interest rates falling to near zero.

Last week figures showed the economy shrank 1.5% in the fourth quarter, the worst since 1980, while legendary American investor Jim Rogers advised people to "sell any sterling you might have", as the UK is "finished".

The case was underlined by a CBI survey today which showed just 16% of retailers saw sales volumes in the first two week of January improve on the same period last year, while 63% reported decline.

The balance of minus 47% was only marginally better than the minus 55% notched up in a dismal December despite some of the heaviest discounting in decades.

In a sign of ebbing confidence on the High Street, a balance of 52% of retailers expected sales to decline in February — the gloomiest forecast since the CBI survey began in 1983.

Ian McCafferty, chief economic adviser at the CBI, said: "Most of the retail sector continues to struggle as the recession bites more deeply, and February will be tough. It is possible that pre-Christmas discounting by some retailers numbed many shoppers to the allure of the New Year sales."

Howard Archer of Global Insight said he now expected the UK economy to contract by 3.1% in 2009, compared with his earlier forecast of 2.9%. That would be the steepest decline since the aftermath of the Second World War.

"The fact that the CBI's January survey was not quite as awful as anticipated does not disguise that it still portrays an extremely weak picture of consumer spending," he said. Retailer pessimism "suggests they are highly worried that — once the clearance sales are over — consumers will batten down the hatches even more tightly."