GBP USD Picks Itself Up Off the Floor

The pound ended its losing streak against the dollar on Monday, climbing above the 1.35 benchmark following a sharp sell-off towards the end of last week.

However, the UK currency’s gains were modest amid receding interest rate rise bets and a possible confrontation between Britain and the EU over post-Brexit Northern Ireland trading arrangements.

Investors – who were wrong-footed by the BoE’s decision to keep borrowing costs at a record low 0.1% last week – now expect a rate hike at the central bank’s December meeting, but uncertainty abounds among market participants following mixed signals from rate-setters.

The GBP USD rate plateaued in the 1.35 mid-range on Monday and into this morning. Helping to prop it up was news from an industry body overnight that retail demand is getting back on track since restrictions have eased.

The British Retail Consortium (BRC)-KPMG Retail Sales Monitor showed that on a total basis, retail sales increased in the UK by 1.3% last month. On a two-year basis, total retail sales increased 6.3% in October compared with the same month two years ago.

Helen Dickinson OBE, chief executive of the BRC, said: “Customer demand is getting back on track ahead of Christmas as sales grew at a faster rate than the month prior, and well above its pre-pandemic levels. As social calendars started filling up with festivities, clothing and footwear sales performed well.”

Fed official points towards rate hikes in 2022

While the pound was still licking its wounds following last week’s surprise interest rate rhetoric from the BoE, the dollar was firm on Monday – but below Friday’s peak.

No fewer than six Federal Reserve officials made speeches on Monday. Vice-Chair Richard Clarida said the economic criteria necessary for the Fed to hike interest rates could be met by the end of next year provided the economy progresses as expected.

Speaking at an event hosted by the Brookings Institution, Clarida said: “While we are clearly a way away from considering raising interest rates, if the outlooks for inflation and unemployment I summarised a moment ago turn out to be the actual outcomes realised over the forecast horizon, then I believe that these necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022,”

Looking ahead

The US Producer Price Index for October is published in the US today, with economists expecting the inflation gauge to run hot.

Investors in the pound must wait until Thursday for the next influential data sets from the UK economy: Gross Domestic Product for the third quarter, and Industrial Production and Manufacturing Production – both for September.

Pound Sterling Forecast – Powered by Lumon