The pound’s rally has run out of steam of late – a sign that much of the optimism surrounding the UK economy’s pandemic-fuelled recovery has already been priced into the market. This was compounded by Monday’s warning from Bank of England Governor Andrew Bailey of rising UK inflation – although he stressed this might not persuade the central bank to increase interest rates.
The pound to dollar rate managed to edge back above the 1.39 barrier yesterday for the first time in five days. Having traversed the 1.38 level, the pair made the move higher on the back of a dip in dollar value and encouraging retail sales figures – before sliding back again overnight. UK retail sales returned to growth in February despite lockdown. The jump higher was driven by a triumvirate of factors: purchases of school uniforms, increased spending on home improvement and Valentine’s. Day.
According to the British Retail Consortium (BRC), like-for-like sales were up 9.5% year-on-year during the month, following a stagnant January when fresh lockdown restrictions were enforced. However, BRC chief executive Helen Dickinson OBE warned that despite plans to ease lockdown, the coming months would remain challenging: “Many retail businesses will be hoping that customers will return to shops and have spent hundreds of millions on making their premises Covid-secure, but previous reopenings have shown that demand can be slow to come back”.
Dollar Falls Back as Yields Stabilise
The dollar’s recent rally extended into March due to the Federal Reserve’s apparent reluctance to resist higher Treasury borrowing costs or rate hike expectations – with all eyes on the Fed’s two-day meeting next week. Yesterday, however, the US currency slipped lower as Treasury yields stabilised, providing room for riskier currencies such as the pound to make gains.
The National Federation of Independent Business reported that the US Business Optimism Index dropped to 95 in January from 95.9 in December – missing market expectations of 98.7. While anxiety among small-business owners eased in February, they are still wrestling with the impact of the recent spike in Covid-19 cases in the US and an uneven economic recovery.
Another barren day in the UK economic calendar means investors must wait until Friday for a raft of notable releases, including trade balance, production, and GDP growth rate from January.
US inflation figures hit the headlines today, with the Consumer Price Index forecast to climb 0.4% in February from 0.3% and 1.7% annually from 1.4% in January. Tomorrow also sees the release of February’s US Monthly Budget Statement. Further signs that the US economy is on course for a significant recovery in the coming months could weaken demand for the safe-haven dollar.
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