Soft US Data Fails to Derail USD, Pound to Dollar Rate Held Close to 1.2650

January 3, 2024 - Written by Tim Boyer

STORY LINK Soft US Data Fails to Derail USD, Pound to Dollar Rate Held Close to 1.2650

The Pound to Dollar exchange rate was trapped in narrow ranges ahead of Wednesday’s New York open and traded around 1.2720.

Sterling did demonstrate some notable resilience on the crosses which also cushioned GBP/USD, but it struggled to make any headway, especially with less confident risk conditions and a vulnerable Euro.

There were no significant UK developments on Wednesday with the dollar and global conditions dominating price action.

Although GBP/USD jumped after the US data releases, it settled just below 1.2650 with only tentative gains on the day.

The US JOLTS data recorded a decline in job openings to 8.79mn at the end of November from a revised 8.85mn the previous month. This was slightly below consensus forecasts of 8.85mn and the lowest reading since March 2021.

According to the BLS; “During the month, job openings decreased in transportation, warehousing, and utilities, as well as in federal government. On the other hand, job openings increased in wholesale trade.”

The US ISM manufacturing PMI index edged higher to 47.4 for December from 46.7 previously and slightly above market expectations of 47.1.

Production recorded marginal growth for the month, but new orders contracted at a slightly faster rate and there was a further decline in trade volumes.

Employment posted a further small decline for the month while prices declined at a faster rate.

Prices within the manufacturing sector declined at the fastest rate for 8 months.

According to ISM Chair Timothy R. Fiore; “The U.S. manufacturing sector continued to contract, but at a slightly slower rate in December as compared to November. Companies are still managing outputs appropriately as order softness continues.”

The data was certainly relatively soft, but failed to trigger a significant dollar relapse.

Treasuries failed to hold initial gains and the 10-year yield traded fractionally below the 4.00% level.

According to MUFG; “The big drop in yields is likely behind us for now given the market now is fully priced for a 25bp rate cut in March. Weak US data is now needed to validate the move in yields and if that is not forthcoming over the coming days/weeks, the scope for the US dollar to retrace the sell-off in Nov/Dec is high.”

There was also significant caution ahead of minutes from the December Federal Reserve meeting.

According to ING; “Given the strong dovish reception by the market after the December Fed announcement, there is a risk of the minutes preventing further dovish bets as some conditionality (in terms of economic data developments) for easing policy emerges in the minutes.”

Markets are still pricing in over a 70% chance of a Fed rate cut in March.

According to MUFG; “We’d certainly be of the view that the minutes are more likely than not to imply rate cuts coming later than March, and hence there is a greater risk of disappointment given where market rates are now.”

ING added; “We are inclined to think that the dollar can hold on to most of yesterday’s gains in the next couple of days, as data may prove benign and investors favour defensive positions ahead of Friday’s US payrolls – which are expected to print a respectable 170k.”

ING also notes the seasonal elements in play; “While the seasonality factor isn’t as strong, January tends to be a good month for the dollar, with DXY having risen on average 0.4% in the past 20 years. February has shown a stronger positive seasonality pattern, with DXY having appreciated in each of the past seven years.”

Alvin Tan, head of Asia FX strategy at RBC Capital Markets, sees scope for further dollar gains over the next few weeks; "In general we remain relatively more positive on the U.S. dollar," he said. "In terms of cable (the dollar-pound exchange rate), it can get back down towards $1.24 in the next few months."

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TAGS: Pound Dollar Forecasts