British Pound or U.S. Dollar: Which Will Win The Race?

By: Richard_Cox

For most of this year, there has been a relatively clear cut race between the British Pound and the US Dollar.  The outcome so far has been surprising, as the central bank stance in these two economies clearly favors the British Pound.  As the US Federal Reserve looks increasingly committed to cutting its historic QE programs, most might have expected that the greenback would have had a banner year.  But this has not occurred, and many have been left surprised as a result. 

So, why might this be occurring?  What explains the relative strength of the British Pound against the US Dollar?  One explanation can be found in the resiliency of the British consumer, as retail sales figures have consistently beaten analyst estimates and shown gains for six months in a row.  This means that the real performances seen in the underlying economy could be much stronger than originally expected, and the British Pound stands to make continued gains as a result. 

Strength in Consumer Spending

Looking at the specifics, most of this improved economic activity can be seen in the fashion and luxury space, where total spending figures have improved dramatically.  “Improved buying in fashion and luxury retail outlets suggests continued strength going forward, “said Jane Wyman at UK Models.  “At the moment, there is no real indication that we will be seeing any major changes in the sales numbers that are posted by fashion outlets.” 

As long as the fashion and luxury space remains robust, it is highly likely that we will see the economic data surprise to the strong side in many other areas.  With consumer spending habits making critical gains in the higher end retail space, there is good indication that reports like annualized GDP will also follow in the bullish trend.  This is because lower end retail markets tend to follow the trajectory and pace that is set in the retailers that producer more expensive items. 

British Pound Market Trends

(Chart Source:  CornerTrader)

Going forward, trends in the British Pound will depend heavily in the performances that are posted in the retail space.  As long as positive consumer sentiment is confirmed by rising sales numbers, we will start to see hawkish inflation arguments both from market analysts and from the Bank of England (BoE) itself.  This would create a highly bullish scenario for the Pound, given the fact that there are very few economies that are worried about upside inflationary pressures in the currency global environment. 

This essentially means that we could see broad based gains in the Pound when compared to everything from the Euro and Yen, to the Swiss Franc and the US Dollar.  In any case, we are likely to see some significant moves in the Pound before the end of the year.  But at this stage, there is little reason to believe the Pound will be finishing this year at a valuation lower than its current levels. 

By Richard Cox

© 2014 Richard Cox - All Rights Reserved

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