Negative consensus on UK economy and GBP for 2023But this could be challenged by upcoming dataAs UK earnings season shows consumer resilience

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Incoming results from major UK retailers suggest the UK economy might be doing better than economists had expected going into this year, raising the prospect for upside surprises in UK economic data and the British Pound.

The UK's largest supermarket, Tesco, said Thursday that UK sales in the six weeks to January 7 grew 7.2%, almost identical to the 7.1% reported by its smaller rival J Sainsbury on Wednesday.

Marks and Spencer meanwhile reported robust third-quarter results while JD Sports joined Next and Card Factory in reporting better-than-expected results for the festive season.

The trading updates hint that the release of official data next week could come in better than expected and challenge a consensus amongst economists that the UK is set for an extended recession.

"Plenty to be cheery about, if only because things seem to have brightened considerably for the UK economy in the last few months. The second half of the year still seems murky, as everyone has been at pains to point out in their trading updates, but for now the situation seems a lot better than feared," says Chris Beauchamp, chief market analyst at IG.

"A slew of trading updates has pushed the FTSE 100 to 7800 for the first time since May 2018, as the UK index continues to outshine its US peers," he adds.

Upside surprises in the data would, in turn, prove supportive of Sterling which continues to underperform its major peers: the Pound to Euro exchange rate had retreated to its lowest level since September at 1.1280 before recovering on Thursday to 1.1310, and the Pound to Dollar exchange rate meanwhile holds an advance above 1.21 at the time of writing courtesy of the broader USD retreat.

John Stepek, editor of the Money Distilled newsletter for Bloomberg says, "flicking through UK trading updates this AM does not yet scream "consumer recession".

He says he is seeing solid or strong figures from Sainsbury's, JD Sports, Ten Entertainment (bowling alleys), Warpaint (make-up), car dealer Lookers, Topps Tiles and Grafton (DIY).

The earning seasons could challenge a consensus expectation amongst economists that the UK will be the worst-performing of the major economies in 2023 because of a cost of living crisis. This assumption informs a widespread pessimism towards the Pound.

Above: A survey of economists reveals the UK is expected to shrink by more than peer nations in 2023.

"We remain cautious on the pound... the UK growth outlook remains bleak for several reasons. On the back of high energy prices and Brexit-induced supply bottlenecks, the UK currently experiences the steepest rise in consumer prices within the group of G10 economies," says Dr. Claudio Wewel, FX Strategist at J. Safra Sarasin.

But the incoming trading results suggest scope for positive surprises.

Sainsbury's CFO said the spiralling price pressures seen in 2022 are now easing and look set to come down this year.

The supermarket reported a record Christmas with sales over the festive season, not only driven by higher prices but the volume of goods sold too.

Retail chain JD Sports Fashion said annual profits will be towards the top end of expectations after cheering festive sales growth of more than 20%.

The chain said the performance in the six weeks to December 31 was "particularly impressive".

The evidence would back the predictions of some foreign exchange forecasters who are expecting the Pound to put in a better performance in 2023 than was the case in 2022.

MUFG, the global investment bank and lender, says peak pessimism towards the British Pound may be close to passing. "Our sense as we enter 2023 is that we may have reached or will soon reach peak pessimism," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG.

MUFG reckons there are a number of factors that could see GBP turn a corner:

The blowout in the UK trade deficit has halved from its nadirEnergy price declines point to a further improvement in the trade deficitA resolution to public sector strike actions looks more likely than notThe new government has adopted a credible plan to deal with the country's financesProgress continues to be made with the EU on the outstanding issues concerning the Northern Ireland protocolFinally, political certainty is set to make a return following a tumultuous 2022 that saw three Prime Ministers occupy 10 Downing Street.

"PM Sunak looks to have restored some order and credibility to the office of PM after his two predecessors and our sense as we enter 2023 is that we may have reached or will soon reach peak pessimism and this year could be a year of better sentiment toward the UK," says Halpenny.

The predictive abilities of Christmas trading updates from UK-focussed retailers will be challenged next week when the ONS releases a bevvy of official data, including retail sales for December.

Following a quiet start to the year the data calendar hots up with the release of employment and wage data on Tuesday, inflation data on Wednesday and retail sales data on Friday.