The pound to dollar rate briefly broke through the elusive 1.37 barrier yesterday – its highest level since May 2018 – before retreating. The pound started the day in fine fettle thanks to sanguine inflation data from the Office for National Statistics: the consumer price index rose to a slightly higher-than-expected 0.6% in December from 0.3% in November, while the retail price index – a separate measure of inflation – ticked up to 1.2% in December, from 0.9% in November. Despite remaining a country mile from the Bank of England’s (BoE) 2% inflation target, it represents a step in the right direction during a difficult period for the UK economy.
Good things come in threes: completing the equation for the pound yesterday was the rapid pace of the UK’s Covid-19 vaccine rollout – which is raising hopes of an accelerated economic recovery, despite the threat posed by lockdown restrictions – and wagers by investors that the BoE will leave interest rates untouched at its next meeting of monetary policymakers. Rising inflation was largely responsible for pouring cold water on expectations that the BoE will move towards negative rates – for now at least.
The potential for the vaccine rollout to inject strength into the economy was given added weight by Bank of England Governor Andrew Bailey yesterday, who said: “I really do think that we are going to see a pronounced recovery in the economy as the vaccination program, as it is doing now, rolls out”.
Biden Optimism Dents Dollar
All roads led to Washington D.C. for the dollar yesterday, where Joe Biden was sworn in as the 46th President of the United States. Having received the keys to the White House, he will spearhead an administration that is expected to take a more hands-off approach to the value of the dollar than his predecessor, Donald Trump. During the ceremony, the new President vowed to end the “uncivil war” in the polarised country, which is still battling a pandemic that has battered its economy and killed more than 400,000 of its citizens.
The pond vs dollar rate was back above the 1.37 level this morning. Optimism that the massive stimulus package unveiled by Mr Biden a week ago will boost economic growth was responsible for sapping demand for the safe-haven dollar.
President Biden’s first full day in office is a busy one in the nation’s economic calendar. Hitting the headlines is a slew of influential data: building permits, housing starts, continuing jobless claims, and the Philadelphia Fed manufacturing survey. In contrast, we must wait until Friday for data that might impact the pound – the pick of the bunch being the Markit services PMI for January.
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