GBP USD Exchange Rate Digests UK Retail Sales Slump

GBP USD Exchange Rate Sinks Below 1.27

The pound bounced off 1.36 against the dollar on Thursday into the mid-range. Expectations of rate rises provided the UK currency with a spring in its step – although the timeline for further monetary policy tightening remains the source of much debate, with some analysts questioning whether the Bank of England will act in February.

Money markets are currently pricing in more than 100 basis points (bps) in interest rate hikes this year and an 87% chance of a 25 bps rise next month, in the wake of data on Wednesday that showed UK inflation rose to its highest since 1992 in December.

Turmoil in Downing Street did not dent sentiment towards the UK currency in early trading. Boris Johnson has his back to the wall as he fights to save his job amid an escalating revolt over ‘partygate’.

British retail sales tumbled by 3.7% last month from November, with consumers doing much of their Christmas shopping early.

Compared with 12 months earlier, sales volumes were down by 0.9% amid the Omicron coronavirus variant, the Office for National Statistics said on Friday morning.

Economists had on average forecast that sales volumes would drop by a less stark 0.6% on the month and would be 3.4% higher than December 2020.

By this morning, the GBP USD rate had slid to a fraction below 1.36.

Dollar little changed

Early dollar gains were trimmed on Thursday after the recent upward trajectory of US Treasury yields paused. This was compounded by an unexpected jump in weekly applications for unemployment insurance.

The number of Americans filing new claims for unemployment benefits hit a three-month high last week, amid a winter surge of Covid-19 infections that disrupted business activity.

Initial claims for state unemployment benefits increased 55,000 to a seasonally adjusted 286,000 for the week ended 14 January – the highest level since mid-October and the largest rise since July. Economists had forecast 220,000 applications for the period.

A separate report from the National Association of Realtors showed that existing US home sales nosedived by 4.6% in December to a seasonally adjusted annual rate of 6.18 million units – with sales falling across all regions. Economists had predicted sales would fall to a rate of 6.44 million units.

Looking ahead

Investors must wait until Monday for the next releases of note when the Markit Manufacturing and Markit Services purchasing managers’ indices for January from both the UK and US economies hit the headlines.

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