GBP/USD FX Update: "January and February are typically good months for the Dollar" say ING

January 10, 2024 - Written by John Cameron

STORY LINK GBP/USD FX Update: "January and February are typically good months for the Dollar" say ING

The Pound to Dollar exchange rate found support below 1.2700 on Monday and hit highs at 1.2765 around the European close.

GBP/USD was unable to make further headway on Tuesday and retreated to 1.2720 as the dollar fought back in global markets.

Risk appetite was also slightly more cautious with no follow through from strong overnight Wall Street gains which limited the scope for both Pound buying and dollar selling.

According to Socgen; “There’s been nothing to shout about from UK data recently, but GBP/USD doesn’t look stretched and if EUR/USD holds here, Sterling may make an early push for USD 1.30.”

The latest UK retail data cast some doubt on the narrative of improved UK data.

The British Retail Consortium (BRC) reported that like-for-like UK sales increased 1.9% in the year to December from 2.6% previously and below consensus forecasts of 2.3%.

BRC Chief Executive Helen Dickinson commented; “The festive period failed to make amends for a challenging year of sluggish retail sales growth, as weak consumer confidence continued to hold back spending. The post-Christmas sales were unsuccessful in enticing spend in areas such as furniture and homeware, with households remaining cautious about making larger purchases.”

She added; “2024 looks to be another challenging year for retailers and their customers, and spending will continue to be constrained by high living costs.”

The Bank of England stance on interest rates will remain a key element for the Pound.

Bank of America senior G10 rates strategist Kamal Sharma commented; "The ultimate test is whether the market is right in its assumption that the Bank of England cuts interest rates five times this year."

He added; "The house view is no rate cuts this year but risks are for the easing cycle commencing in the second half of the year."

The US National Federation of Independent Business (NFIB) index rose to 91.9 in December from November’s 90.6. It was the first increase since July, but the index has been below the long-term average of 98 for two years.

Owners reported that inflation was the top problem and the share of owners reporting inflation as their main concern rose to a seasonally adjusted 23% from 22% the previous month.

There was evidence that labour-market shortages were easing, although there were still concerns over increasing labour costs.

Futures markets indicated that the chances of a Fed rate cut in March had edged lower to 60% with markets pricing in a 91% of a cut at the May meeting.

In comments on Monday, Fed Governor Bowman stated that labour market supply and demand are coming into better balance.

She did, however, add that upside inflation risks remain including geopolitical considerations and easing financial conditions,

According to Bowman she will remain cautious in her approach to considering changes in interest rates.

Bowman also stated that she was willing to raise the policy rate should inflation stall or reverse.

Nevertheless, the overall rhetoric was less hawkish and she added; “it will eventually become appropriate to begin the process of lowering our policy rate’ if inflation continues to fall. And with all signs currently pointing to easing inflationary pressures, the market is already anticipating this.”

According to Commerzbank; “There is little to suggest that a significant correction in rate expectations is imminent and that the USD will strengthen significantly as a result.

Bank analyst Antje Praefcke added; “Perhaps the inflation figures will manage to slow the Dollar's downward trend. But I am afraid that the Dollar will quickly be back in the penalty box on weak numbers.”

ING commented; “January and February are typically good months for the dollar, and our call is for patience rather than jumping on the next leg of the dollar bar trend just yet. But the overall environment tends to support more range-bound dollar trading than any aggressive reversal higher in the dollar just yet.”

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TAGS: Pound Dollar Forecasts