Pound Sterling Regains 1.27 Against the US Dollar on Strong UK Data

January 4, 2024 - Written by David Woodsmith

STORY LINK Pound Sterling Regains 1.27 Against the US Dollar on Strong UK Data

The Pound to Dollar exchange rate posted highs above 1.2725 after the UK data on Thursday before a retreat to 1.2660 in immediate response to the US data.

Underlying Pound sentiment held firm which provided important underlying backing and GBP/USD regained the 1.2700 level into the European close.

UK data helped underpin Sterling against major currencies during the day with the releases beating market expectations.

Equities also posted net gains which helped underpin the UK currency.

The final reading for the UK PMI services-sector index was revised higher to a 6-month high of 53.4 from the flash reading of 52.7 and compared with the November reading of 50.9.

Business confidence increased to a 7-month high while the overall rate of output price inflation accelerated to a 5-month high.

The Bank of England will be monitoring inflation pressures closely and will be uneasy over the threat of persistent inflation within the services sector.

Tim Moore, Economics Director at S&P Global Market Intelligence, which compiles the survey, commented; "Strong wage pressures fuelled another month of substantial input cost increases in the service sector. The latest survey indicated a robust rise in prices charged across the service economy amid efforts to defend margins, with the rate of inflation the fastest since last July."

ING is confident that inflation pressures are easing, but added; “Markets are pricing the first rate cut from the Bank of England in May, which feels a bit early. We also think when rate cuts do begin – potentially in August – they will be a little more gradual than markets are currently pricing.”

As far as the housing sector is concerned, mortgage approvals increased to just above 50,000 for November from a revised 47,900 previously.

There was a £2.0bn increase in net lending for the month with a strong increase in consumer credit.

According to the Bank of England, consumer credit growth was the highest for close to seven years.

Jane Foley, Head of FX Strategy at Rabobank commented; "UK mortgage approvals and lending data are better than expected suggesting that the market could be in danger of repeating the mistake of a year ago in pricing in too much pessimism."

She added; "The firmer data also pushes back on hopes for early and aggressive BoE rate cuts in 2024."

Jeremy Stretch, head of G10 FX Strategy at CIBC Capital Markets added; "early BoE rate cut expectations (are) continuing to be pared."

Latest US ADP data recorded an increase in private-sector payrolls of 164,000 for December compared with consensus forecasts of 115,000 and following a downwardly-revised 101,000 increase for November.

As far as wages are concerned, the annual increase slowed further to 5.4% from 5.6% and the lowest figure since August 2021.

ADP chief economist Nela Richardson commented; "While wages didn't drive the recent bout of inflation, now that pay growth has retreated, any risk of a wage-price spiral has all but disappeared."

Given the impact on inflation, the Federal Reserve will welcome a further easing of wage pressures.

Initial jobless claims declined to 202,000 in the latest week from a revised 220,000 the previous week and below consensus forecasts of 216,000.

The overall labour-market data is unlikely to prompt any talk of an early rate cut within the central bank.

Following the data, Treasuries lost ground with the 10-year yield again testing 4.00% before holding around 3.98%.

Markets were still pricing in around a 65% chance that rates will be cut at the March policy meeting, but higher yields were important in providing overall dollar support and limiting GBP/USD gains.

Overall risk conditions will also remain important for currency markets.

According to ING; “The dollar is once again more expensive to sell with 10-year Treasuries again close to 4.0%, and the predominance of equity/global risk sentiment as drivers for FX markets means that the dollar dynamics remain strictly tied to markets reassessment of stock market levels.”

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TAGS: Pound Dollar Forecasts