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Pound bolstered by upbeat data, US dollar rocked by Fed

The pound firmed last week in response to overwhelmingly positive UK data, but found these gains limited by domestic coronavirus concerns.

At the same time, the US dollar fluctuated as the minutes from the latest Federal Reserve policy meeting struck a more hawkish tone than expected.

So far this week we have seen Sterling trade in a wide range, with GBP/EUR slipping to €1.15, and GBP/USD climbing to around US$1.42, before retreating.

Looking to the week ahead, GBP investors are likely to be wary of UK coronavirus developments as they threaten to infuse fresh volatility into the pound.

The pound moved broadly higher through most of last week as a series of high-impact UK data releases all printed positively.

Sterling opened the week on the front foot, with GBP investors welcoming the reopening of more of the UK economy on Monday.

This uptick in the pound was then reinforced by the UK’s latest jobs figures after they reported a surprise fall in domestic unemployment in March.

While UK inflation also printed above expectations on Wednesday, by then GBP exchange rates had fallen back from their best levels, as Sterling sentiment was knocked by concerns that the spread of the Indian variant of the coronavirus throughout the UK could disrupt the government’s roadmap for reopening more of the economy.

The pound then made another attempt to rally at the end of the session on the back of some impressive retail sales figures and solid PMI print. But this again proved short-lived, with Sterling this time being undermined by concerns over the lack of progress in talks between the UK and EU over the controversial Northern Ireland protocol.

So far this week, we have seen the pound struggle amidst ongoing coronavirus fears.

This week is seen as key in determining whether the threat posed by the Indian variant of the coronavirus could disrupt the government’s plan to move ahead to the next stage of restrictions easing on 21 June.

Boris Johnson is expected to update the public on what the government knows about the new strain so far in a press conference later this week. We expect to see the pound rally if he appears confident that the final parts of the UK economy can open up as planned next month.

US dollar volatile as Fed hints at tapering

The US dollar had a poor start last week, as a prevailing risk-on mood prompted investors to shy away from the safe-haven currency.

Speculation that the Federal Reserve will seek to maintain its ultra-accommodative monetary policy in spite of soaring inflation then reinforced the USD selloff.

But these expectations were quickly revised following the publication of the minutes from the Fed’s latest policy meeting in the middle of the week. Policymakers struck a more hawkish-than-expected tone, dropping hints it could soon start tapering its bond purchases, and triggering a sharp rebound in USD exchange rates.

The upside in the US dollar then faded again in the second half of the week, as a continued improvement in market sentiment and a drop in US Treasury yields dented demand for the ‘Greenback’.

However, the US dollar was able to close the week on a high after the latest Markit PMI releases reported a record expansion in the US manufacturing and services sector this month.

Looking ahead to this week, it’s likely that questions over the Fed’s potential plans for tapering will remain a key focus for USD investors, and as such traders are likely to keep a close eye on any comments from Fed policymakers.

Elsewhere, the latest US durable goods figures could also influence USD exchange rates this week, with another expansion of goods orders potentially triggering an uptick in the ‘Greenback’ on Thursday.

Any gains could be reinforced by the latest US GDP estimate if growth in the first quarter is revised higher in the wake of some recent positive data releases.

Closing out the week will be April’s PCE price index. Will a sharp increase in the Fed’s preferred indicator for inflation extend some support to the US dollar?
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