UK retail sales leapt higher in January according to the Office for National Statistics (ONS) climbing 1.9% from December, when freezing temperatures and snow kept shoppers home and retail sales fell by 1.4% The ONS said that the sharp downward revisions to December’s numbers are attributed to the harsh weather delaying data collection.

The stronger than expected numbers will certainly help allay fears after the UK economy contracted by 0.5% in Q4 2010, the strong January numbers will help traders see the contraction as a temporary weather-driven setback. It appears also that the introduction of a higher value-added tax (VAT) hasn’t crimped demand as many expected it to do.

However, headwinds may be on the horizon with the governments spending cuts set to cost 330,000 public-sector employees their jobs lowering the number of people willing to open their wallets and spend on consumer goods if their jobs are in question. This coupled with rising inflation in the UK, which hit 4% in January and will rise further according to the Bank of England Inflation Report earlier in the week, could sap demand for goods if retailers pass on too much of rising costs to the consumer.

Pound_Surges_on_Retail_Sales_body_gbp.png, Pound Surges on Retail Sales Strength; Headwinds to Economy May Not Slow Gains

The pound leapt higher upon the release, adding to its morning gains, as the unexpected strength of the release took most by surprise. Bulls may eye the upper-Bollinger band at 1.6270 and the Feb. 3rd high at 1.6280 as potential upside targets. Many investors will remain bullish on the pound despite some of the aforementioned headwinds to the economy amid expectation that the Bank of England will hike rates sooner than the ECB, Fed and BoJ in an effort to bring inflation under control.

Written by Jonathan Granby, DailyFX Research Team