Pound climbs higher after US Federal Reserve disappoints dollar

LaToya Harding
·4-min read

The pound received a boost on Monday, using a quiet session in Europe to indulge in some economic optimism.

Sterling was up 1.06% against the dollar (GBPUSD=X) at $1.3986, its higher in a month, and 0.64% higher against the euro (GBPEUR=X) at €1.1627.

The currency was also lifted by a fall in the dollar, which slumped due to the Federal Reserve’s insistence that rising inflation will only be temporary, and that the central bank will not be taking action to combat it.

"With UK shops and restaurants open for a week, real time data is clearly showing that UK citizens have loved nothing more than hitting the shops, or a beer garden for a taste of normality," Jeremy Thomson-Cook, chief economist at Equals Money, said.

"Similarly, road traffic, the number of people travelling to workplaces and job posting suggests that the combination of stronger spending and the vaccine effort should support sterling in the coming weeks.

"It is how long this bounce lasts that is crucial for sterling but, in the meantime, this little impulse of pound strength is coming just as we get some negativity from both the US and Eurozone."

The pound rallied against the dollar on Monday. Chart: Yahoo Finance
The pound rallied against the dollar on Monday. Chart: Yahoo Finance

It came as stock markets across Europe were subdued despite successful vaccine rollouts across Britain and on the bloc, resilient economic data and positive signals from the UK where reopening has begun.

In London, the FTSE 100 (^FTSE) closed 0.28% lower at the 7,000 point mark, while the German DAX (^GDAXI) was 0.59% lower.

The French CAC (^FCHI) bucked the trend, climbing 0.15% as the country works towards reopening to foreign travellers who have been vaccinated or who can show evidence of a negative COVID test.

President Emmanuel Macron said on Sunday that France is working to progressively lift the restrictions at the beginning of May and is aiming to build a European certificate to facilitate the travels.

Laith Khalaf, financial analyst at AJ Bell, said: "The FTSE 100 has broken through the 7,000 mark, but that’s just a hair’s breadth above the 6,930 peak it hit in December 1999. This suggests the UK stock market has returned next to nothing over the last 21 years, but actually, UK equity investors have more than doubled their money in this time."

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London's benchmark index reached an all-time high of nearly 7,900 before the pandemic. The future direction of oil prices and the market’s current preference for value stocks are likely to be key to any new record for the FTSE as these factors have been a vital reason behind the index’s advance so far this year.

Across Europe, COVID vaccinations have started to gather pace after a slow start at the beginning of the year.

Meanwhile, 32.8 million people in the UK have received a first dose of the coronavirus vaccine and 9.9 million have had a second dose, according to the latest government data.

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Across the pond, the S&P 500 (^GSPC) dipped 0.59% and the tech-heavy Nasdaq (^IXIC) fell 1.19%. The Dow Jones (^DJI) edged 0.41% at the European close.

On Friday, both the Dow Jones and S&P 500 had closed at record highs. The Nasdaq is showing gains of 9% so far this year.

“Investors are feeling the sugar rush as the effects of major stimulus packages begin to translate into increasing evidence of a strong economic rebound,” Richard Hunter, head of markets at Interactive Investor, said.

“In the US, the most recent data has reflected this impact, with robust showings from housing, retail sales and an improvement in the jobless claims number.

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“Meanwhile, the US banks have also reported significant profit hikes, reinforcing hopes that the recovery is firmly on track."

Asian shares were mostly higher overnight amid cautious optimism about a global rebound. The Hang Seng (^HSI) rose 0.50% and the Shanghai Composite (000001.SS) climbed 1.50%.

The Nikkei (^N225), Japan's benchmark index, quickly lost early gains and closed flat as investors reacted to a summit by prime minister Yoshihide Suga with president Joe Biden over the weekend.

“At the moment, it seems like markets are in that goldilocks zone: policy is accommodative and economic fundamentals improving – but not so much to increase expectations of an unsustainable recovery, inflationary pressures and tighter monetary policy,” Kyle Rodda of IG said.

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