UK Exporters Offered Relief as Pound / Dollar Exchange Rates Rise Sees Gains Limited

The pound to dollar exchange rate (GBP/USD) retains a soft bias at the present time - bad for holiday-makers but it does ensure UK exporters remain competitive in the US market.

Companies such as ARM Holdings rely heavily on the US market; and a stronger UK currency can hit their bottom line. Indeed, as much of global trade is denominated in USD the advantages from an international perspective will also be felt.

Recent economic news out of the UK points to a deceleration in growth which will in turn ensure UK interest rates are kept 'lower for longer' - another positive for UK industry.

Markets are keeping the GBP capped on these interest rate expectations. At the time of writing we note that today's GDP data has given sterling a boost into the weekend:

• We see the pound to euro exchange rate conversion at 1.2690 - 0.11 pct higher than at last night's close.
• The pound to dollar exchange rate conversion (GBP/USD) is 0.26 pct in the blue at 1.6072.

PS: The above are spot market quotes; your bank will affix a spread at their own discretion. An independent FX provider will guarantee to undercut your bank's rates, in some instances they are able to deliver up to 5% more currency. Please learn more.

UK Retail Sales: What Happened?

Further pressure was placed on the UK's currency when it was shown the retail sector suffered a slowdown in the previous month:

• Retail Sales (YoY) (Sep) grew by 2.7%, analysts had predicted growth of 2.8%.
• Retail Sales (MoM) (Sep) fell by 0.3%, analysts had only expected a decline of 0.1%.

Consumer spending has helped drive the UK's economic recovery, but news on Thursday from retailers Debenhams and Tesco and estate agents Foxtons have underlined the slowdown.

Slow wage growth, falling house prices, and global economic worries have raised concerns about the UK recovery and this is now being felt in the currency markets.

Keeping the Pound Weaker for Longer Will Help UK Exporters

Keeping a lid on the value of the pound conversion rate may not be good for importers and holiday makers but it does help the UK export community.

Chris Towner at foreign currency specialists HiFX gives his verdict following the MPC minutes:

"Central banks around the globe are happy to hold off from raising interest rates, fearing that even the smallest of rate rises could harm the already fragile economic recovery.

"This includes the UK, as the Bank of England put aside the fact that they expect the economy to grow by 0.9% in Q3 after the same rate of growth in Q2, and that the unemployment rate has dropped from 7.7% to 6% from a year ago – and instead focus on the few signs of inflation pressure.

"Lessons can be learned from Japan, who raised rates too quickly in the 1990’s resulting in yet another economic slump and 20 years of deflation that they are still trying to exit.

"The outlook remains that central banks will continue to chase their tails looking for reasons not to raise rates, and this is reflected by their focus changing from the unemployment rate to now the slowing inflation rate, in terms of determining their decision to raise rates.

"Let’s face facts - the economic crisis of 2008-2009 was so severe that the Bank of England is rightly very sensitive to holding back these better times and this will continue for some time to come.

"This has put sterling under some much needed pressure and will give UK exporters some breathing space for now. However the UK economy is one of the better placed economies and therefore the fact that sterling is on the back foot may not last for long."

Equity Markets Lend Support to Sterling

The recovery in the sterling euro exchange rate witnessed through the course of the mid-week session gives us important insights - the GBP/EUR does appear to be mirroring risk sentiment.

Of course, suggesting this relationship will persist is a hard call.

Nevertheless, currency market watchers would do well to keep an eye on the markets.

"Global equities have turned marginally positive this afternoon, with the FTSE 100 switching around the 6,390 level. The Dow Jones Industrial Average opened unchanged after yesterday’s strong performance. Investors will continue to have tech stocks in focus as the demand for risk at this juncture could indeed be telling of demand going into the rest of Q4. The dollar has been gaining and gold has been steady," says David White at Spreadex.

On London’s main market, the biggest gainers today are Esure Group, Playtech and Croda, all up by more than 4 per cent.

SuperGroup and British American Tobacco are among the heaviest laggards, down over 3 per cent.

US Dollar Squeezed Higher by Inflation Data

Meanwhile, in the US the focus was on the September inflation data.

According to Piet Lammens at KBC Markets:

"The dollar lost a few ticks in the run‐up to the publication of the CPI report. Headline inflation was slightly higher than expected (unchanged at 1.7%). The deviation from consensus was minor, but currency markets were apparently positioned for a downward surprise (USD short).

"This didn’t materialize and the dollar was squeezed a bit higher. EUR/USD set a minor correction low in the 1.2665 area. USD/JPY tries to regain the 107.00 level in a sustainable way."