US Dollar Weakness Outweighs Pound Sterling Selling Interest

December 22, 2023 - Written by Tim Boyer

STORY LINK US Dollar Weakness Outweighs Pound Sterling Selling Interest

The US Dollar and Pound both struggled on Thursday, primarily under the weight of interest rate expectations.

Markets remained convinced that the Federal Reserve will cut interest rates relatively early in 2024 and this week’s UK inflation data has brought forward expectations of Bank of England rate cuts.

As the Euro to Dollar (EUR/USD) rate strengthened to test the 1.1000 level, the Pound to Dollar (GBP/USD) exchange rate rallied to 1.2685.

According to Scotiabank; “Solid gains intraday suggest Cable gains may be able to stretch to 1.2735 into the end of the week. Price trends turn more bullish above there. Support is 1.2590/95.”

GBP/USD drifted to 1.2630 after Thursday’s European open amid BoE speculation before a rebound as markets turned their attention to dollar selling.

Joshua Mahony, chief market analyst at Scope Markets, noted; "The pound continues to suffer, with the UK inflation report helping to bring forward expectations over the Bank of England easing next year."

He added; “yesterday’s November inflation report has finally seen markets believe in the ability to swiftly return to the 2%, which looks likely within the next six-months.”

As far as data is concerned, the CBI retail sales survey reported a decline in the headline index to –32% for December from –11% the previous month.

This was the eighth successive monthly decline and companies expect an even sharper decline next month with an expected reading of –41%.

CBI Principal Economist Martin Sartorius commented; “The retail sector ended 2023 on a glum note, with the ongoing downturn in sales volumes deepening during the crucial holiday trading period. Looking ahead, retailers are bracing themselves for a New Year’s chill, as sales are set to fall at an even quicker pace next month.”

The UK government borrowing requirement declined to £14.3bn in November 2023 from £15.2bn the previous year.

For the first 8 months of 2023/24, however, the deficit widened to £116.4bn from £92.0bn the previous year.

UK economist Ashley Webb of the consultancy Capital Economics still expects that there will be tax cuts in the Spring 2024 budget, especially given the impact of lower yields.

He noted; “the recent drop in market interest rate expectations supports our view that interest rates will be lower in 2025 than the OBR predicted in November. As a result, we expect this to give the Chancellor more wiggle room to unveil a further pre-election splash at the Spring Budget.

Nevertheless, he added; “But this would almost certainly be followed by hefty tax rises in 2025 after the election.”

As far as US data is concerned, initial jobless claims increased only slightly to 205,000 from 203,000 the previous week and below consensus forecasts of 214,000.

There was, however, another weak reading for the Philadelphia Fed manufacturing index with further deterioration to –10.5 from –5.9 previously and below consensus forecasts of –3.0.

There was a sharp decline in new order for the month with unfilled orders also in contraction.

Prices paid increased at a faster rate on the month while the prices received component eased slightly.

Companies were slightly more optimistic over the outlook while price pressures are expected to ease.

The final third-quarter GDP reading was revised down to 4.9% from the previous reading of 5.2%. There was also a small downward revision to the prices index.

Treasuries rallied after the flow of data with the 10-year yield declining to around 3.84%.

There was notable selling pressure against the yen with USD/JPY sliding to lows around 142.10 after the government raised its 2024/35 inflation forecast.

Scotiabank noted; “Even with the risk aversion-led lift for the USD yesterday, the DXY was unable to break out of its week-long consolidation range and broader price trends still lean bearish for the dollar index.”

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Dollar Forecasts