Pound to Dollar Forecast: Buying on Dips Around 1.2720

January 11, 2024 - Written by John Cameron

STORY LINK Pound to Dollar Forecast: Buying on Dips Around 1.2720

Stronger-than-expected US inflation data on Thursday triggered a dollar comeback in global currency markets.

Overall risk conditions were less buoyant with significant UK losses and the Pound to Dollar (GBP/USD) exchange rate dipped to lows just below 1.2700 from highs close to 1.2780 ahead of the US open.

There was buying on dips with GBP/USD trading around 1.2720.

US consumer prices increased 0.3% for December compared with consensus forecasts of a 0.2% increase with the year-on-year increasing to 3.4% from 3.1% and above expectations of 3.2%.

Core prices increased 0.3% on the month, which was in line with expectations, although the year-on-year rate retreated to 3.9% from 4.0% and slightly above consensus forecasts of 3.8%.

There was a significant increase in rent prices with a 6.5% annual increase while insurance prices increased over 20% over the year.

Elsewhere, initial jobless claims declined to 202,000 in the latest week from a revised 203,000 previously and below consensus forecasts of 210,000.

Continuing claims also declined to 1.83mn from a revised 1.87mn.

The stronger-than-expected data triggered selling pressure in Treasuries with the US 10-year yield moving back above the 3.00% level, although there was a retreat from highs around 4.06%.

Immediately after the data, the chances of a Fed rate cut in March dipped to near 60% from 67% ahead of the data, but there was a subsequent reversal with the chances of a move moving back to near 70%.

Equities also lost ground following the data with Wall Street indices lower. The FTSE 100 index surrendered early gains and declined 0.7% on the day.

Weaker equities were significant in hampering the Pound in global markets.

According to Seema Shah, Chief Global Strategist at Principal Asset Management; “Today’s inflation report reinforces the notion that the market had gotten a little overexcited around the timing of rate cuts. Certainly, as long as shelter inflation remains stubbornly elevated, the Fed will keep pushing back at the idea of imminent rate cuts.”

ING commented; “In the wake of the Federal Reserve's dovish shift in December, financial markets had moved to price an interest rate cut as soon as March. However, the tight jobs market and today's firmer-than-expected inflation numbers suggest this is unlikely, barring an economic or financial system shock. We continue to think the Fed will prefer to wait until May.”

Nomura considers that the; “continuing easing of financial conditions should make a March rate cut less likely, which is consistent with our monetary policy outlook of the first pre-emptive rate cut happening in June 2024.

ING did, however, point out that there was evidence that car and rent prices were set to decline over the next two months.

There were no significant UK data releases during Thursday.

The latest UK GDP data is due for release at Friday’s European meeting with expectations of 0.2% growth for November after a 0.3% contraction for October.

ING is more confident over the UK outlook. It commented; “The UK stagnated through much of 2023 and might have even entered a technical recession, albeit a small one. But things are looking brighter. Rate cuts will dampen the mortgage squeeze and gift the government with extra room for tax cuts.”

It added; “While we don't expect a dramatic acceleration in UK growth this year, the chances of a recession have fallen.”

According to Scotiabank; “The pound retains some bullish underlying trend momentum and remains relatively comfortable towards the upper end of its recent trading range.

Nevertheless, it added; “the lack of progress through the 1.28 area may be starting to wear a bit and price action over the past month is still shaping up to be potentially bearish Sterling needs to push on through resistance at 1.2800/20 to progress.”

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TAGS: Pound Dollar Forecasts