The pound continued its recent dominance in the currency markets yesterday following some more encouraging data showing signs that the economy is recovering.

The pound continued its recent dominance in the currency markets yesterday following some more encouraging data showing signs that the economy is recovering.

Retail sales grew by 3% in July, surpassing a rise of 2.5%. In recent weeks the pound has been rallying following encouraging data from the manufacturing, construction and service sectors as well as seeing an increase in house prices. For the time being, it looks like investors are looking past Mark Carney’s ‘Forward Guidance’ on keeping interest rates 0.5% until unemployment falls to 0.7% and are focusing on economic data to position themselves on the pound.

Data from the US yesterday was also encouraging as the annual rate of inflation rose to 2%; the Feds target for tapering quantitative easing. The job sector also some encouraging data as the number of people filing for jobless claims fell by 15,000 from the previous month. The US dollar strengthened off the back of the news; but this proved to be very short lived.

FOMC member James Bullard cautioned markets last night on their excessive optimism on the US economy and stated that he would like to see more encouraging data before he would favour reducing quantitative easing. The result of his comments was detrimental for the US dollar, as it fell to an 8 week low against the pound and the euro.

But fears of a reduction of QE still clearly persist as can be seen by the fall in stock markets yesterday and the continuing demise of emerging market currencies like the Thai Baht and the Indian rupee. As we stand the Indian rupee sits at a record low against the pound.

However whilst rupee buyers will no doubt be wondering how much higher GBPINR could go, an element of caution should be noted. The Reserve Bank of India has continued to make plans to restrict the weakness of the rupee with various measures such as restricting the amount of money that can be sent out of the country and banning the imports of gold coins and bars. Whilst these measures have been limited so far, if the RBI decide to take drastic action and actually intervene in the markets then we could see the rate fall considerably.

Key Announcements:

14.55pm – USD – Reuters/Michigan Consumer Sentiment Index (Aug): Expected to rise to 85.5.