Pound to Dollar Rate Rally Ended by Disappointing Data

Pound to Dollar Rate Dips Due to Risk-Off Mood

The pound spent the majority of last week marching steadily upwards against the dollar. Having briefly broken through the 1.37 barrier on Wednesday, the pair reached a 32-month high (1.374) the following day. Instead of slipping immediately lower – a natural reflex when touching fresh highs in recent weeks – the rate remained above the enigmatic benchmark for almost 24 hours. On Friday morning, however, it was met by a hattrick of disappointing data releases that snapped its winning streak, sending back into familiar territory:

  • The latest UK consumer confidence index from market research firm GfK slipped lower in January.
  • Official figures revealed British retail sales staged a weak recovery last month during the key Christmas shopping period, rounding off the worst year on record for consumer spending.
  • A flash reading of activity in the UK services sector – which accounts for roughly 80 per cent of the nation’s output – for January recorded it lowest reading (38.8) in eight months, well below the 50 mark that indicates expansion.

The pound’s woes were compounded by comments from a string of ministers towards the end of the week that dashed hopes Britain could relax lockdown restrictions from March, including Boris Johnson who said it was “too early to say”. Nearly five million people have now received their first dose of a vaccine; however, the impact on transmission rates remains unclear.

Dollar Edges Higher

It was no coincidence that the pound to dollar rate hit its highest level since spring 2018 on the day Joe Biden was sworn in as the 46th President of the United States. As a safe-haven currency, the dollar tends to fall when the economic outlook is upbeat because this boosts risk appetite. So, with Biden at the helm and his massive stimulus package awaiting Senate approval – not to mention his determination to repair US relations with other large economies in the short term – investors were provided with the platform to explore riskier assets.

Risk appetite and the dollar’s value did a U-turn on Friday, however, after bleak economic data from beyond the United States borders – including the UK’s figures – suddenly made the dollar’s safe-haven status more attractive.

Looking Ahead

The only economic data release of note for the pound vs dollar rate today is the Chicago Fed National Activity Index for December – a monthly index designed to gauge overall economic activity and related inflationary pressure.

The Federal Reserve holds its first monetary policy meeting of 2021 on Wednesday. The central bank’s Federal Open Market Committee is expected to keep interest rates unchanged near zero this month and over the horizon.

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