The pound was firm on Tuesday morning as it showed a muted reaction to the extension of the UK’s lockdown relaxation plan, with investors optimistic following upbeat jobs data. The number of employees on company payrolls in Britain surged by 197,000 in May to 28.5 million as pandemic restrictions eased. While this represented a record amount, it was still more than half a million below its pre-pandemic peak. The figures from the Office for National Statistics (ONS) also showed that wages grew at their fastest rate since 2007 in the year to April, and the unemployment rate fell for the fourth month in a row in April as firms hired more staff in response to the relaxation of restrictions.
Having initially been sanguine about the ‘Freedom Day’ delay, by yesterday afternoon the pound vs dollar rate had slipped to a one-month low against the dollar, as the US currency stabilised and investors digested the lockdown news – dropping by around 0.5% to 1.404, its lowest point since 14 May.
UK inflation has edged above the Bank of England’s 2% target for the first time in almost two years, after the cost of fuel, clothing and eating out increased as the economy emerged from lockdown. The UK consumer price index (CPI) rose to 2.1% in May – compared with 12 months ago – sharply higher than 1.5% in April, data released by the ONS showed on Wednesday morning. This marks the highest CPI reading since July 2019, and was higher than economists forecast of 1.8%.
The upbeat data caused the pound to dollar rate to climb back to the 1.41 level this morning.
US data shows inflation speeding up
The dollar edged higher on Tuesday, boosted by data showing accelerating inflation, and investor anticipation of the Federal Reserve’s two-day policy meeting which ends today. The minutes from this gathering of central bank monetary policymakers will be poured over for hints of plans to start tapering its bond purchases.
Data released by the US Census Bureau on Tuesday showed US retail sales declined more than expected in May, with spending shifting back to services from goods as the US vaccination programme allows the nation to overcome Covid-19 restrictions. However, robust demand is outpacing supply, triggering inflation in the process, with the producer price index for final demand increasing 0.8% in May having risen 0.6% the previous month.
Until now, Federal Reserve officials – including Chair Jerome Powell – have said that rising inflationary pressures are transitory and ultra-easy monetary settings will remain in place for a while yet. However, recent economic data has stoked concerns that price pressure could force the central bank into introducing an earlier stimulus withdrawal than previously expected.
Investor attention will be focused on the minutes from the Federal Reserve’s monthly meeting of monetary policymakers, released today, for clues around the potential tapering of its fiscal stimulus programme.