Sterling steady against the dollar as economic data, trade deals offer support

Sterling was steady against the dollar on Wednesday, hovering near Monday’s three-year high, as it continued to be supported by favourable economic data last week as well as Britain’s recent trade deals.

Investors also looked towards a multi-year spending review by finance minister Rachel Reeves in two weeks which will set the budgets for public services.

Sterling was little changed at $1.3511 but stayed close to the three-year high of $1.3593 it touched on Monday. It was little changed against the euro, with the euro broadly flat at 83.86 pence in its seventh week of losses against the pound.

“Sterling’s done pretty well recently,” Rabobank strategist Jane Foley said, pointing to stronger-than-expected inflation and slightly stronger retail sales data last week and trade deals that Britain struck with both India and the US as reasons for the currency’s resilience.

However, the spending review is pushing attention back onto the challenges that Reeves faces around the fiscal situation in the country, Foley said, as the government, which had pledged not to increase taxes and keep spending tight while still fuelling economic growth, seems to be prepared to pour more money into defence and health, among other issues.

Reeves is due to set out budgets for individual government departments for the next three years in a spending review on June 11, after the overall total was outlined in October. “There’s obviously a bit of a conundrum for her to face, and that could create perhaps a few headwinds for sterling, given that it has had a reasonably good run for now,” Foley said.

Sterling has risen by 8.0 per cent against the dollar so far this year, and has regained ground against the euro in the past weeks from its April lows at 87.38 pence. Last week’s data showed that British retail sales jumped in April, while the inflation print erased market expectations for a cut at the Bank of England’s next meeting in June. “The BoE is still trying to manage these dual elements of sticky inflation and sluggish growth,” said Paul Hollingsworth, head of developed markets economics at BNP Paribas, during a call presenting the French bank's global economic outlook.

Despite optimism around the “green shoots” from consumer spending data, Hollingsworth warned of supply-side woes and the prospect of further fiscal consolidation measures over the coming months.