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Economic data on both sides of the Atlantic continues to improve due to the accelerating return to post-Covid normality, however, inflation fears continue to weigh down the US dollar.
With investors also moving away from the dollar due to the decreasing relevance of its safe-haven status – something which boosts its value in times of crisis – it was a positive week for both the pound and euro.
Sterling’s value has improved slightly over the last week, ranging between US$1.408 and $1.423 and €1.159 and €1.163.
Inflation as expected
Wednesday’s UK inflation figures were broadly in line with expectations, with a year-on-year figure of 1.5%.
Month-on-month inflation rose by 0.6 % which, as expected, and this had little effect on the exchanges.
Strong retail sales
The positive mood in the UK was enhanced on Friday with retail sales data for April showing a 9.2% increase month-on-month – more than double the 4.5% expected. This pushed the pound to its highest levels of the week at US$1.423.
Euro soars vs dollar
The euro also surged to its highest point against the dollar since February at US$1.224 after US Federal Reserve officials reaffirmed their commitment to maintain their ultra-loose monetary policy, despite rising inflation.
FOMC eases bond purchases
However, on Wednesday evening, the minutes from the Federal Open Market Committee’s (FOMC) April meeting were released and revealed for the first time since the pandemic that “it might be appropriate at some point” to consider tapering off asset purchases if the economy shows “rapid progress”.
Markets have been watching closely for clues about when the central bank might start tapering its bond purchases, which are currently set at least US$120 billion a month and will be looking to the next FOMC meeting for further guidance.
Week ahead
With a fairly light week of economic data ahead, the markets will closely watch any speeches from Federal Reserve (FED) representatives concerning inflation.
Some investors think that inflation could spread to the UK over the forthcoming months.
Tuesday (25 May)
- UK public sector borrowing data
- German GDP
Wednesday
- New Zealand interest rate decision
Thursday
- US durable goods orders
- US GDP
Friday
- Eurozone consumer confidence
- US core price index
- US goods trade balance
