On Friday, the British pound recorded its first weekly gain against the greenback in the last four weeks. The currency was able to make the climb thanks to a weaker US dollar and retail data that turned out to be better than expected, thereby helping investors look beyond the rising pressure on Boris Johnson, the British Prime Minister.
Factors affecting sterling
The retail sales data released on Friday showed a decline of 0.5% in May, which is better than the 0.7% fall that had been predicted by economists. There was a 0.24% rise in the sterling by 1446 GMT against the US dollar, which took it to $1.22915. But, it remained flat against the euro and was trading at 85.825 pence. The weekly appreciation of the pound against the US dollar stood at 0.59%.
The news that two parliamentary seats were lost by the Conservatives Party of the UK Prime Minister did not have much impact on the sterling. This was a huge blow to the ruling party, which prompted the chairman of the party to resign. The prime minister has seen his authority battered recently over revelations that a party was held at his office on Downing Street during a lockdown imposed because of the COVID-19 pandemic.
A no-confidence vote was recently held against Johnson by his party and he managed to survive it. Another one cannot be held for a year. Market analysts said that the premier was under a lot of pressure because of the ‘partygate’ scandal and also due to the bad election results. This means that if he pushes forward on issues like the protocol for Northern Island, then investors could start re-pricing risk premiums for Brexit, but it hasn’t happened yet.
Other than the declining retail sales data, PMI numbers were also released on Thursday for the month of June. This number stood at 53.1, which was higher than the forecast of 52.6. Analysts said that domestic data was not as important as the surging inflation, the monetary policy tightening of the central bank, or the increasing fears of recession.
The Chief Economist of the Bank of England, Huw Pill said on Friday afternoon that the central bank’s primary tool for monetary policy tightening would be interest rates. It is beginning to reverse its push for providing economic stimulus, which means bond selling will begin again. The majority of the Monetary Policy Committee (MPC) voted for a rate hike of 25 basis points and Pill was one of them.
Three of the MPC members had voted for a 50 basis points hike. Analysts said that balancing things was extremely tricky because the central bank wants to control inflation and also avoid a deep downturn while doing so. They said that sterling already has a lot of bad news already priced in and the currently just reacts to weakness in the US dollar. This happened because traders had scaled back their bets off when the US Federal Reserve would hit the peak in terms of interest rates.