Pound weakens against the US dollar as risk appetite falls

The pound weakened against the US dollar yesterday, finishing the day at $1.5156.

• In early trading yesterday the pound continued its rise against the greenback after Sainsbury’s reported an 11.3% rise in underlying annual profits to £543 million, up from £488 million a year earlier. This news further buoyed investor confidence that an economic recovery in the UK may soon be underway, driving London equity markets slightly higher in early trading.
  
• However, sterling’s gains were capped to some extent because of the early release of the UK’s latest unemployment figures on Tuesday. It showed 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, taking the total jobless rate to 7.1%.
  
• In addition, speculation about the release of the Bank of England’s Quarterly Inflation Report mid-morning also weighed on the pound early on, as the market waited for more guidance about the bank’s quantitative easing plans going forward. Last week the central bank unexpectedly announced a £50 billion extension to its asset purchase program.
  
• When the announcement came, sterling very rapidly retreated into negative territory against the greenback, as the BoE announced it expected the UK’s economic recovery to be “slow and protracted”. It forecast a 4.5% year-on-year decline in economic growth at its lowest point and said it did not expect the economy to grow again until the middle of next year. London equity markets fell heavily as a result, weakening the pound markedly as investors looked to the perceived safety of the greenback.
  
• In addition, the BoE’s forecast that inflation will fall below the 2% target for the next three years did little to ease the pound’s plight into yesterday lunch.
  Sterling ’s losses were further extended in the afternoon after the release of worse-than-expected retail sales data in America. Sales at US retailers fell by 0.4% last month, much lower than the 0% analysts had been forecasting after the 1.2% drop in March. This bolstered demand for the safe-haven of the dollar, with the pound weakening over a cent at one point.
  
• In early trading today the pound has resumed its slide against the dollar, as investors continued to absorb the details of yesterday’s BoE report.
  There are no major announcements due in the UK today, however in the US Month-on-Month Producer Price Index figures for April are out at 13.30 BST.