Pound strengthens against the US dollar on improved risk appetite

The pound strengthened against the dollar yesterday as risk aversion eased following a two-day flight to safety because of swine flu. Although the first death from the virus outside Mexico was confirmed yesterday morning, better-than-expected CBI retail sales data and solid demand at a UK gilt auction, both announced on Tuesday, eased investor worries that an economic recovery may yet be some way off. The auction of UK gilts was the first since UK Chancellor Alistair Darling’s budget announced last week, in which he announced a record issuance of £220 billion for the coming fiscal year. Also driving sterling’s gains yesterday morning was surprisingly positive consumer confidence and home price data released in the US on Tuesday, again adding to improved market sentiment and extending sterling’s gains in the morning.

However, far worse-than-expected US GDP data released at lunchtime clawed back some of sterling’s early gains. It revealed an annualised contraction in the US economy of 6.1% for the first three months of 2009, far worse than the 4.9% analysts had predicted. A 30% fall in exports was the primary driver behind the contraction, the biggest decline for 40 years, as the global recession reduced worldwide spending. The figure also represented the third consecutive quarter of contraction of the US economy, the first time there has been three in a row since 1975. Nevertheless, despite sterling losing some of its early gains, it remained in positive territory, buoyed by the strong performance of equity markets. The FTSE 100 finished the day up 93.9 points at 4189.59. Throughout the day, continued speculation over what measures the Fed would announce following their policy meeting slightly affected the market, although most analysts agreed that no major new initiatives would be announced. As it turned out, they were right, as the central bank kept interest rates on hold at virtually zero and continued as planned with its quantitative easing program, citing some tentative signs of economic recovery and strong equity market performance as the basis for their decision. The decision served only to further strengthen the pound’s position against the greenback, as investors speculated that there could be light at the end of the tunnel. Sterling finished the day at $1.4764.

In early trading today sterling has continued its rise against the greenback, as investors continue to take positive news from the Fed’s interest rate decision. There are lots of important announcements out today in both the US and the UK. In the former, the Month-on-Month and Year-on-Year Core Personal Consumer Expenditure Prices Index is out at 13.30 BST, as is March’s Personal Spending and Personal Consumption Expenditure Deflator data. Finally, at 14.45 BST, the Chicago Purchasing Managers’ Index for April is released. In the UK, Year-on-Year Nationwide House Prices data for March is due today.