Pound to Dollar Rate Dips Due to Risk-Off Mood

The AUDGBP exchange rate failed to get a boost from the Reserve Bank’s latest interest rate meeting with the pair trading below the 0.5500 level.

The pound dropped back below 1.40 on Friday – down from the three-year highs of 1.42 earlier in the week – as risk appetite diminished following a sharp spike in bond yields, forcing investors to seek shelter in safer assets such as the dollar. Stronger-than-expected data from the US economy stoked fears that the Federal Reserve could withdraw fiscal stimulus sooner than anticipated, helping Treasury yields to record their biggest daily rise since March.

Household income in the US rose 10% in January from December, the Commerce Department said on Friday – the second-largest increase on record, eclipsed only by last April’s gain.

Consumer spending – which accounts for more than two-thirds of US economic activity – increased by the most in seven months in January, as more pandemic relief money reached low-income households and new Covid-19 infections dropped, gearing the economy up for faster Q1 growth.

The personal consumption expenditures price index – the Fed’s preferred inflation gauge – rose 0.3% for the month, exceeding expectations of a 0.2% rise. Inflation was up 1.5% year over year, in line with estimates – still well below the Fed’s 2% target. Last year, the central bank officially stated that it would allow inflation to exceed 2% for a period before raising rates. However, pandemic headwinds have kept inflation subdued, leading monetary policymakers to say they likely will be on hold for years.

UK Inflation Risks are “Balanced”

Bank of England Deputy Governor Dave Ramsden addressed the Institute of Chartered Accountants in England and Wales on Friday, during which he spoke about inflation risks, which he said are “balanced”: “I would still see the risks broadly tilted to the downside – that’s for activity. Inflation: the risks are broadly balanced,” adding “When I look at the UK, I see inflation expectations – whatever measure you look at – well-anchored.”

Looking Ahead

The Markit purchasing managers’ index for the UK manufacturing sector in February is forecast to hold steady this morning. UK Chancellor Rishi Sunak delivers his second budget on Wednesday, which will aim to boost productivity and economic growth. Combine this with the lockdown exit roadmap and the rapid pace of the UK’s vaccination programme and the pound could profit.

Meanwhile, the Institute for Supply Management index for the US manufacturing sector is forecast to tick higher today. The most significant release of the week for the dollar is Friday’s Nonfarm Payrolls, with the number of new jobs created during the previous month in all non-agricultural business forecast to rise – this would represent a welcome outcome for the currency.

Get in touch to discuss these factors in further detail to see how your currency exchange is likely to be impacted.