The pound fell against the dollar on Tuesday but remained on course for its first monthly gain this year. Even Britain’s gloomy growth outlook, which continues to dampen sentiment, hasn’t derailed the UK currency’s progress in the second half of May.
Despite dipping in value, the pound remains well above its mid-May low when it sunk to its lowest level since March 2020.
At the beginning of the month, the Bank of England (BoE) hiked interest rates to a 13-year high amid four-decades high inflation and cut growth forecasts – raising fears of a recession.
The pound managed to dig itself out of a hole following the publication of robust labour market and CPI data, helping it to reverse its deep losses. However, investor attention remains focused on red-hot inflation and how the BoE will manage monetary policy in the coming months.
Dollar boosted by hawkish Fed comments
The dollar ticked higher on Tuesday despite recent talk of potentially slower US interest rate hikes. Dovish comments from central bank officials have shifted investor focus from aggressive rate hikes to curb inflation to whether Fed policy tightening has applied pressure to the economy – rhetoric that has weighed on the dollar in May.
It remains to be seen whether the Fed pivots from its aggressive pace of policy tightening. However, hawkish remarks overnight from Fed governor Christopher Waller signalled a change of tone for the central bank. Waller said he sees rate increases continuing this year as part of an effort to rein in inflation.
US home prices hit a 35-year high in March, despite rising borrowing costs. The S&P CoreLogic Case-Shiller index showed the average home value in the US rose 20.6% in March compared with a year earlier – the biggest annual gain in over 35 years.
“Those of us who have been anticipating a deceleration in the growth rate of US home prices will have to wait at least a month longer,” said Craig Lazzara, Managing Director at S&P DJI. “Although one can safely predict that price gains will begin to decelerate, the timing of the deceleration is a more difficult call.”
US consumer confidence declined in May to its lowest level since February, underscoring the impact of decades-high inflation on the nation’s shoppers. The Conference Board revealed that its consumer sentiment index decreased to 106.4 from an upwardly revised 108.6 reading the previous month – missing the consensus for a decline to 103.6.
The only notable data set from the UK economy this week hits the headlines on Wednesday: the S&P Global/CIPS manufacturing PMI for May.
A busy day in the US sees several notable data sets slated for publication – including the ISM Manufacturing PMI for May – and speaking engagements in the diary for two Fed officials.
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