Economic news

Sterling Rises above $1.42 after PMIs Point to Recovery

LONDON, May 21(Reuters) - The British pound rose on Friday and was on track for its third consecutive week of gains against the dollar, helped by a series of data releases reinforcing market expectations for a strong economic recovery in the United Kingdom.

A preliminary reading of UK PMI data for May hit its highest level on record, with hotels, restaurants and other previously-closed customer services seeing the strongest jump in demand.

Earlier in the session, separate data showed British retail sales surged in April. Sales volumes jumped by 9.2% month-on-month - twice the average forecast in a Reuters poll of economists.

Although sterling did not move substantially on the news, it strengthened throughout the morning, and was up 0.3% on the day at $1.4228 at 1037 GMT.

This puts sterling within reach of its most recent peak of $1.424 in February.

Versus the euro, it was up 0.3% at 85.945 pence per euro .

Sterling rose above the key $1.42 level on Tuesday for the first time since February, boosted by a combination of dollar weakness and bets on a faster UK economic recovery.

Britain took a significant step towards lockdown-easing on Monday, with a ban on international travel lifted and restaurants allowed to reopen for indoor service.

Neil Jones, head of FX sales at Mizuho, said that the UK economic recovery is partially priced in to the pound, but that it is not fully factored in, because there is no clear precedent for how much vaccines will allow the economy to reopen or what the impact will be on GDP.

Jones expects cable to reach $1.45 in the summer.

Data releases earlier this week showed that British inflation more than doubled in April and UK unemployment unexpectedly fell between January and March.

For currency investors, the key question is whether rising inflation will impact the Bank of England’s monetary policy, prompting the central bank to raise rates sooner.

“The PMIs make it pretty clear that cost pressures are rising and that firms feel comfortable with passing these onto consumers,” wrote ING economist James Smith in a note to clients.

“We’re inclined to say inflation will gradually trend lower from this time next year, reducing the immediate pressure on policymakers to consider rate hikes,” he added.

Reporting by Elizabeth Howcroft; Editing by Catherine Evans and Andrew Cawthorne

Source: Reuters

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