GBP USD Recovers Losses Amid Inflationary Pressures

GBP EUR Higher with UK Construction Figures

The pound began recovering last week’s losses against the dollar on Monday after Bank of England (BoE) Deputy Governor Ben Broadbent cautioned that Britain’s tight jobs market could increase inflation risks.

According to Dr Broadbent, inflation might “comfortably exceed” 5% in April next year. His comments stoked expectations for an interest rate hike at the BoE’s December meeting next week to control surging prices.

Broadbent’s view on price risks echoed remarks from BoE policymaker Catherine Mann last week, who believes the Omicron coronavirus variant could trigger more inflation if consumers switch demand again from services to goods

However, market participants still widely expect that the central bank will hold interest rates at a historic low of 0.1% at its 16 December policy meeting as the spread of the Omicron variant escalates globally.

UK retail sales jumped in November compared with the year before, the latest report by KPMG and the British Retail Consortium (BRC) showed overnight.

Sales between 31 October and 27 November increased by 5% compared with the same period a year before, comfortably exceeding growth of 0.9% reported in November 2020.

Commenting on the report, BRC Chief Executive Helen Dickinson said: “As people prepared their wardrobes for the cold weather this winter, consumers took advantage of discounted clothing, shifting the focus of Black Friday from just electronics and household appliances,”

GBP USD continued its push towards the 1.33 benchmark following the publication of the report.

Safe-haven dollar performs amid Omicron concerns

The dollar was supported on Monday by uncertainty surrounding the Omicron variant and expectations the Federal Reserve will tighten monetary policy – but it was the pound’s performance that dominated sentiment towards the GBP USD pair.

On Sunday, the Centres for Disease Control and Prevention (CDC) revealed that Omicron has now been discovered in 15 US states so far.

Speaking during an ABC News interview, CDC Director Dr Rochelle Walensky said: “We know we have several dozen cases and we’re following them closely. And we are everyday hearing about more and more probable cases so that number is likely to rise,”

The dollar was still riding in the slipstream of comments by Fed Chair Jerome Powell last week who publicly accepted that inflation would remain high for longer than previously predicted and the central bank must consider this when setting policy.

The US currency experienced a heavy selloff on Friday following a weaker-than-expected jobs report, though the data did little to dampen investor expectations that the US central bank will accelerate the pace of tapering its asset purchases and hike interest rates, starting next year.

Looking ahead

Goods and services trade balance, nonfarm productivity and unit labour costs are scheduled for publication from the US economy today.

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