Most Pound Exchange Rates Rally - UK Retail Sales in Upside Surprise

By Gary Howes

The British pound (GBP) enjoyed a boost on Thursday after it was shown the UK consumer is in fact in rude health. On Fridy morning we see it is a case of 'more of the same' - gains against the EUR and USD, but the commodity dollar complex is a worry.

UK retail sales surprised market participants on Thursday by coming in stronger than expected.

The result on the UK pound was notable:

The pound to dollar exchange rate shot up to record day on day gains of 0.25 pct. The rate was quoted at 1.6617 at mid-morning.

The pound to euro exchange rate was a full half percent higher at 1.2090. On Friday we note further gains here, however there are warnings that momentum could soon fade.

Even the GBP-AUD has recovered somewhat after a tortuous week. But, follow the previous link to see why the AUD, CAD and NZD are proving problematic.

(Note all quotes are mid-market rates; your bank will add a spread which will deviate the rate you are offered. However, an FCA-registered FX provider will get you closer to the market, delivering up to 5% more currency in some cases).

UK retail sales: Good news for the local currency

The UK pound shot up as traders were caught wrong-footed this morning.

• Retail Sales (YoY) (Feb), 3.7% realised, 2.5% expected, 3.9% previous.
• Retail Sales ex-Fuel (MoM) (Feb), 1.8% realised, 0.3% expected, -2.0% previous.
• Retail Sales (MoM) (Feb), 1.7% realised, 0.5% expected, -2.0% previous.

By all accounts the figures were impressive and reminds investors that the UK's economy is likely to be one of the best performing G10 economies in 2014.

The March declines in sterling would have suggested otherwise, so we see today's moves as a healthy re-rating.

Why is the US dollar struggling?

The US dollar is meanwhile under pressure with markets scratching heads as to why the unit has been unable to rally, particularly in light of Fed tapering and decent data outcomes.

According to Kathleen Brooks at Forex.com the reason for the dollar's underperformance is no mystery with the answer lying in US interest rates:

"The flattening of the yield curve is worth watching, since it suggests that bond investors are bearish about the future prospects for the US economy as the Fed embarks on its rate hiking cycle.

"This is concerning as the Fed is only expected to raise rates to 1% by the end of 2015 yet this is spooking the markets. It doesn’t say much about faith in the US economic recovery, which could be bad news for assets linked to US growth like stocks and the dollar."

According to Brooks, the US yield curve continues to flatten, which is starting to alarm FX investors.

This yield spread has a close relationship with USDJPY, and is one reason why USDJPY has failed to rally recently.