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Sterling is set for its biggest weekly gain since December 2020 against a weaker dollar as recent economic data suggests the market does not need to delay its expectations for a further increase in the Bank of England rate.
The US dollar is heading for its worst week since the beginning of February, with 10% of the currency showing fatigue after a 14-week rise.
Money markets are setting the full price for a further 25-basis-point interest rate hike at the BoE’s June meeting and tightened to 128 basis points by the end of the year, rising to around 115 bps on Tuesday after hard labor market data.
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British retail sales rose unexpectedly in April, official data showed on Friday.
On Friday, the pound was flat against the dollar at $ 1.246 after gaining 1.65% this week – the biggest weekly gain since 2.3% in the week ended December 18, 2020.
“UK retail sales have been slightly better than expected and have broken / suspended the notion that the cost of living is large enough to derail the Bank of England’s tightening cycle,” said ING analysts.
This week’s data shows that Britain’s unemployment rate reached a 48-year low in the first three months of 2022. Consumer inflation rose 9% in April, with a Reuters survey of economists pointing to a 9.1% reading.
According to Unicred analysts, long-term models suggest that the British currency has been devalued against the dollar and the euro, but that “a less aggressive BoE, focusing more on UK GDP growth concerns, could weigh on Sterling.”
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They expect the BoE to raise rates much lower than the forward rate, “creating a revaluation risk for the GBP, unless investors further scale rate-raising expectations.”
However, the central bank’s chief economist, Hu Peel, said on Friday that the BoE would need to raise interest rates further to offset the risk of self-sustaining inflation.
Sterling rose 0.1% to 84.74 pence against the euro.
“The newly-discovered Hakin in the ECB means that EUR / GBP may struggle to maintain a move below 0.8450 before returning to 0.8600,” ING analysts said.
The pound is showing a high correlation with risky assets, while the central bank’s toughness and their outlook on the risk of economic recession remain challenging.
(Reporting by Stefano Rebaudo; Editing by Allison Williams)