Pound Climbs Versus Dollar as Both U.K. and U.S. Data Disappoint

Updated on
  • U.K. wages grow at slowest pace in two years, lag inflation
  • Dollar falls after inflation and retail sales figures

The pound hit a weekly high versus the dollar despite a further deterioration in U.K. living standards, as the U.S. was confronted with its own set of disappointing economic data.

While sterling weakened against most of its Group-of-10 peers, it reversed losses against the greenback following a greater-than-expected deceleration in U.S. consumer-price inflation last month and the biggest fall in retail sales since the start of 2016. On the U.K. side, wages grew at the slowest pace in two years.

The focus will now shift to the Federal Reserve rate decision later on Wednesday, with the market expecting a 25-basis-point rise and looking for guidance on its next steps. The Bank of England then meets on Thursday, where investors will be watching to see if the recent political disorder in the U.K. has any impact on the central bank’s tone.

  • GBP/USD climbs 0.2% to 1.2774, after reaching 1.2813, its highest since the U.K. election results
    • Resistance at 1.2807, 50% retracement of June 9 range, and support at 1.2707, June 13 mid open/close price
  • The BOE is expected to leave rates on hold on Thursday
    • “Macro data in the U.K. is starting to crack,” said Neil Jones, head of hedge fund sales at Mizuho Bank. “Real wage growth is key for G-10 interest rate expectations. Without real wage growth, interest rates are very unlikely to push higher. Indeed the BOE’s MPC may return to unanimous dovish 8-0 stance” either this week or next month
    • Sterling should continue to trend lower, Jones says
  • The pound was earlier supported by news that two former Conservative prime ministers on Monday said that May should reassess her approach to leaving the European Union, after the Tories lost their majority in last week’s election. Analysts warned that the pound would remain under pressure
    • “Given the increased risk of a political crisis, the risk that the U.K. may leave the EU without a deal and the fact that growth is likely to continue to slow together suggest it is still too early to change our negative view on the GBP” writes Richard Falkenhall, a senior strategist at SEB AB in Stockholm
    • Expects EUR/GBP to reach 0.90 in coming months
    • Would change this position if negotiations with EU indicate mutual understanding and an increased likelihood of a Brexit deal, Falkenhall says
  • EUR/GBP rises 0.5% to 0.8832, after falling 0.3% earlier and dropping 0.7% on Tuesday
  • Yield on 10-year gilts falls 8 bps to 0.95%

— With assistance by Sejul Gokal, and Stephen Spratt

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