Pound strengthens by over a cent against the US dollar

Sterling strengthened by over a cent against the US dollar yesterday, reaching a 4-month high before finishing the day at $1.5271.

• In early trading yesterday the pound strengthened against the US dollar, as better-than-expected British manufacturing data improved risk appetite in the market. Figures released by the Official of National Statistics showed manufacturing output fell by 0.1% in March, beating consensus forecasts for a 0.8% drop. Investors took this an encouraging sign that the recession was starting to ease, despite the fact it was the largest quarterly drop in UK production since records began in 1948.
  
• Sterling also rose early in the session on the back of strong UK retail sales data released by the British Retail Consortium. They reported a 6.3% rise in the value of sales in shops in April against a year earlier, further building on the 0.6% increase in March.
  
• Elsewhere, the Royal Institute of Chartered Surveyors also released surprisingly positive UK housing data, reporting that enquiries from new homebuyers rose to their highest level since 1999.
  
• More generally, investors took heart from data released in China on Monday night, which showed investment spending rose even though exports fell more steeply than expected, buoying demand for more high-yielding currencies like the pound.
  
• As a result, with risk appetite improving, sterling climbed over 1% in the morning session to hit a four-month high.
  
• In the early afternoon, stronger-than-forecast US Trade Balance data further extended sterling’s gains. Although it was down from last month’s -$25.97 billion, this month’s -$27.58 billion was far ahead of the -$28.90 billion analysts had predicted. This further improved risk sentiment in the market, with investors selling out of the perceived safe-haven of the greenback. Sterling hit a session high of $1.5350 as a result.
  
• However, sterling’s gains were capped mid-afternoon after the accidental release of British unemployment data a day early. It revealed the number of people out of work in the UK rose by 244,000 to 2.22 million in the first three months of 2009, the biggest quarterly rise since 1981. This took the total jobless rate to 7.1%.
  
• Despite this, though, sterling rose strongly on the day, finishing the day up over a cent against the greenback.
  
• Sterling has pared some of yesterday’s gains in trading so far today, ahead of some important data releases from both the UK and the US. In the former, the Bank of England’s Quarterly Inflation Report is due for release at 10.30 BST, followed by a speech by Governor Mervyn King, whilst in the latter Month-on-Month Retail Sales figures for April are out at 13.30 BST.