MARKET NEWS

The Pound was able to recover some ground on Monday with some support from a slightly weaker US dollar. The Pound to Dollar (GBP/USD) exchange rate held above 2021 lows near 1.3400 which helped trigger a covering of GBP/USD shorts with a rebound to near 1.3600.

The Pound to Euro (GBP/EUR) exchange rate also secured a net recovery to 1.1725.

Confidence in BoE Policy Stance Remains Limited

Markets continued to debate the potential for a near-term Bank of England (BoE) interest rate increase with a focus on the December meeting.

There was still no consensus on the outlook for the BoE outcome.

Standard Chartered senior economist Sarah Hewin commented; “The (BOE) signals were very unclear and that’s why sterling took such a hit. Sterling upside in the near term is going to be limited as there is uncertainty being built into policymaking from the BoE.”

Stephen Gallo, a strategist at BMO Capital Markets was still doubtful that rates would be increased next month; “Last week’s BoE policy decision probably demonstrated that higher-than-expected CPI inflation won’t be enough on its own to warrant a pre-Christmas tightening of policy.”

ING is doubtful that BoE expectations drove the GBP/USD gains; “Instead one suspects that Cable is tracing out a broad 1.34-1.38 range that will last into year-end and that the speculative community did not have enough conviction to drive it below the September support levels.”

Cautious UK Retail Optimism

BRC data recorded a 0.2% decline in like-for-like retail sales for October after a 0.6% decline the previous month while total sales increased 1.3% over the year. Retailers overall were more confident over the consumer spending outlook.

BRC Chief Executive Helen Dickinson OBE, commented; “Retail is getting back on track ahead of Christmas as sales grew at a faster rate than the month prior, and well above its pre-pandemic levels. She added; “Retailers are hopeful that demand will continue right through the golden quarter, however, there are challenges ahead with higher prices on the horizon compounded by the many increasing costs faced by consumers.”

Paul Martin, UK Head of Retail, KPMG noted; “The much reported squeeze on household spending has yet to materialise as consumers seem happy to carry on shopping.”

US Dollar Drifts Lower, Inflation Tolerances in Focus

The dollar has edged lower in global currency markets with increased speculation that the Federal Reserve would look to tolerate higher inflation rates. US bond yields tended to drift lower on the day.

ING pointed to comments from Fed Vice Chair Clarida; “His remarks on monetary policy yesterday suggested that the Fed was in no hurry to shift from tapering to tightening, giving an end 2022 indication for Fed rate lift-off.”

RBC Capital Markets analyst Adam Cole expected the dollar to maintain a firm tone, but pointed to the importance of inflation data; “We will get better direction when we get to the U.S. CPI.”

Rabobank noted the importance of global issues; “The outlook for GBP will be guided by expectations regarding the pace of BoE policy tightening relative to the policy decisions taken by other major central banks such as the Fed and the ECB. On the margin, UK politics concerning the issues of Brexit and sleaze may also impact the performance of GBP.”

Commerzbank sees little scope for further GBP/USD gains; “GBP/USD has bounced just ahead of the 1.3411 recent low. This is viewed as corrective, however, currently, we will have to allow for a rebound into the 1.3610/65 band.”

Marshall Gittler, Head of Investment Research at BDSwiss Group; could see little justification for the Pound gains; “I have to say I’m astonished at today’s outperformance of GBP. I can only assume it’s simply some profit-taking or position-closing after the recent sharp move, because I struggle to find any fundamental reason why the currency should be gaining.”