Pound to Dollar Rate Slides from Best in Three Weeks

October 12, 2023 - Written by John Cameron

STORY LINK Pound to Dollar Rate Slides from Best in Three Weeks

The Pound to Dollar (GBP/USD) exchange rate briefly posted 3-week highs just above 1.2330 on Thursday, but failed to hold the gains.

The combination of subdued UK data, mixed Bank of England rhetoric and slightly stronger-than-expected US inflation data triggered a significant reversal with GBP/USD sliding to 1.2250.

US consumer prices increased 0.4% for September, slightly above consensus forecasts of a 0.3%, with the year-on-year rate holding at 3.7% and marginally above market expectations of 3.6%.

Core prices increased 0.3% on the month with the year-on-year rate declining to 4.1% from 4.3% with both figures in line with market expectations.

Initial jobless claims held at 209,000 in the latest week and in line with consensus forecasts while continuing claims increased to 1.70mn from 1.67mn.

Stuart Cole, Chief Macro Economist at Equiti Capital commented; "Overall, there is probably not enough in the report alone to suggest to the FOMC that it needs to be tightening policy again in November, but it will see it as justifying its message that policy needs to remain 'tighter for longer', with the prospect of another rate rise still being kept on the table."

BNPP noted the slightly more dovish slant from Fed officials, but is doubtful that this will be sustainable.

The market and the Fed can't have it both ways and we think the Fed doves will end up eating their words. Once again, the market is very wrong about the Fed, as it's been this whole cycle. The first Fed cut has been moved forward to June from July previously, which is also wrong."

According to Danske Bank; “Markets price only a small chance of another Fed hike, which we agree with as we believe the Fed is done. Still data on inflation and employment will be key for whether the Fed decides to add another hike or not.”

Capital Economics markets analyst Jonathan Petersen considers the dollar overvalued, but added; "We expect the greenback to stay strong as the U.S. and other developed markets slip into recession, and gradually weaken after that.”

The Pound has also been hampered by disappointing data and mixed Bank of England (BoE) rhetoric.

In comments on Thursday, BoE MPC member Dhingra continued to warn over the impact of higher interest rates. According to Dhingra; "The economy's already flatlined. And we think only about 20% or 25% of the impact of the interest rate hikes have been fed through to the economy.”

She added; "So I think that there's also this worry that that might mean that we're going to have to pay a higher cost than we should be paying."

She maintained a downbeat outlook on the economic outlook; "When you're growing as slowly as we're growing now, the chances of recession or not recession are going to be pretty equally balanced. So we should be prepared for that. It's not going to be great times ahead."

Bank of England chief economist Pill was more neutral; "Whether we've done enough - or whether we have more to do - I think is becoming a more finely balanced issue. But we will do what we need to do in order to have inflation at 2% on a lasting basis."

Earlier, UK GDP recorded a 0.2% increase for August after a 0.6% decline the previous month

Nick Rees, FX market analyst at Monex Europe "Today's reading reinforces a narrative that the UK is slipping into stagnation rather than recession."

He added; "In the absence of a growth pickup, further rate hikes look unnecessary, but with a sharp recession also appearing unlikely at this point, nor is there a need to pull forward the timing of any rate cuts."

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TAGS: Pound Dollar Forecasts