Pound to Dollar Rate Consolidates Gains

Pound to Dollar Rate Consolidates Gains

The pound rallied to its highest level against the dollar since February on Monday, after the prospects of an immediate referendum on Scottish independence dimmed, before edging even higher yesterday – reaching 1.416. The UK currency already had plenty of wind in its sails from last week’s upbeat forecasts for growth and employment from the Bank of England – and the welcome developments north of the border provided it with added impetus.

Fading prospects of an independence referendum and hopes for a strong UK economic recovery weren’t the only things strengthening investor sentiment towards the pound yesterday. Overnight the latest BRC-KPMG retail sales monitor showed overall retail sales rose 7.3% in April compared to the same month in 2019 – when the sector was unaffected by the Covid-19 pandemic. UK retail sales have been boosted by pent-up demand after non-essential retailers were given the green light to reopen in April, following more than three months of lockdown – but experts warn that the sector is not yet in the clear.

The UK economy’s recovery gathered pace in March as the nation prepared for the lifting of lockdown restrictions. Gross domestic product rose more than expected (2.1%) following a revised 0.7% increase the previous month, the Office for National Statistics said this morning. The economy contracted by 1.5% in Q1 following the announcement of fresh lockdown restrictions in January.

The pickup has provided the platform for a speedy recovery from the biggest economic slump in three centuries. With companies ramping up investment and households spending savings accumulated during lockdown, economists have shifted their focus from the possibility of negative rates to the prospect of the Bank of England tightening policy.

Dollar dips ahead of inflation report

The dollar was under the cosh yesterday as investors speculated that rising inflation could dent the currency’s value ahead of tomorrow’s closely watched Consumer Price Index – a key indicator to measure inflation. Dollar strength fuelled by rising inflation and subsequent interest rate hikes has become a thing of the past in recent years.

Last week’s disappointing US employment report weighed heavily on the US currency, and though rising commodity prices have raised concerns of higher inflation this year, the US Federal Reserve is expected to keep rates low and continue purchasing assets.

By this morning, the pound vs dollar rate remained above the 1.41 benchmark.

Looking ahead

With the UK calendar practically empty for the rest of the week, investor attention will be focused on today’s US Consumer Price Index, which is forecast to surge higher.