The Pound to US Dollar exchange rate rallied by around two cents yesterday from 1.5950 to 1.6150 as UK Retail Sales performed better than analysts had anticipated, and US Jobless Claims came in weaker-than-expected.
UK Retail Sales improved by 0.6% in September, bringing third quarter growth in the sector up to its highest level since the recession struck in 2008. A large chunk of this improvement was witnessed in Online Sales, which shot up by 19%. The potent private consumption numbers convinced investors that the British economy expanded at a quicker pace in Q3 than in Q2 – when GDP grew by 0.7%. Experts now predict a quarterly Gross Domestic Product score of around 0.8%-0.9%.
Sentiment towards Sterling was also bolstered by a rise in UK interest rate hike speculation: 33% of Britons now expect a first rate rise from the Bank of England within the next 12 months, whilst 69%
predict that rates will be hiked in the next two years.
Comments from Bank of England’s Chief Economist Spencer Dale did nothing to dispel rumours of an earlier-than-anticipated interest rate increase:
“Conceivably it could be 2014.”
However, Dale did mention that growth would have to continue at elevated levels for this scenario to take place.
The US Dollar did not benefit from such a rosy outlook: fundamentally, US Initial Jobless Claims came in worse-than-expected at 358,000 compared to forecasts of 335,000, which dampened hopes of a tapering of Fed asset purchases before the end of 2013.
In a strange turn of fate, the US Dollar was also damaged by a bout of positive risk sentiment, which actually emanated from the 16-day closure of government. With US GDP likely to have been reduced by -0.6% during the furlough, it is looking increasingly unlikely that the Federal Reserve will opt to reduce the pace of its $85 QE3 scheme in the next few months.
So, although the whole US debt deal debacle was bad for global growth prospects and terrible for the reputation of the world’s most influential government, the fact that it may have delayed the Fed’s plans to wind down its stimulus programme was seen as mildly positive for global risk appetite.
With GBP/USD picking up where it left off last month, it is possible that the Pound could surge to a fresh 10-month high of 1.6260 against the ‘Greenback’ in the near future. Next Wednesday’s BoE Minutes report could provide the stimulus needed to send Sterling higher, as could next Friday’s third quarter growth report.
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