Equity Gains Underpin Sterling, Pound to Dollar Rate Holds Above 1.2700

January 23, 2024 - Written by John Cameron

STORY LINK Equity Gains Underpin Sterling, Pound to Dollar Rate Holds Above 1.2700

Pound Sterling Forecast Update: The Pound to Dollar exchange rate edged above the 1.2700 level in Asia on Monday and held a firm tone during the day.

The UK currency held a firm tone on the crosses and GBP/USD posted a net advance to 1.2725 after the Wall Street open despite a firm dollar.

UK equities were able to make headway during the day with a 0.5% gain for the FTSE 100 index. Wall Street built on Friday’s gains and firmer equities helped underpin the Pound in global markets.

There were no significant UK data releases during the day with markets looking forward to the business confidence data on Wednesday.

Scotiabank noted limited near-term influences; “There is very little data on tap in the early part of this week. In the US, Q4 GDP data and the Income/spending/PCE data due later in the week will be the focus for investors. The data should reflect slowing growth momentum and easing core inflation pressures in the US.”

Although the UK manufacturing sector is expected to remain in contraction territory, there are expectations of expansion in services with forecasts that the UK data will beat the Euro-Zone and US data.

Firm data would underpin confidence in the UK outlook and reinforce expectations that the Bank of England will be a global laggard in cutting interest rates.

MUFG commented; "For the BoE to become more confident that they can begin to lower rates to provide more support for growth in the UK, they will need to see further evidence that persistent inflation risks are diminishing.”

The dollar overall has maintained a firm tone in global markets with a further adjustment in Federal Reserve pricing.

Markets are now pricing in just over a 40% chance of a March rate cut from over 60% last week.

According to ING; “For the dollar this week, our macro team forecasts above-consensus fourth quarter GDP on Thursday. This could see the market further pare back Federal Reserve easing expectations this year.”

DBS Bank added; “Despite the Federal Reserve's blackout period, Fed officials have clearly dismissed endorsing the March rate cut pushed by markets at the FOMC meeting on 30-31 January. This week’s important economic data should reinforce the Fed’s patient stance.”

Scotiabank also sees scope for dollar gains; “Recall that the USD may also find support from bullish seasonal trends while longer-term technical signals suggest potential for the USD to recover more of its Q4 decline.”

MUFG takes a similar view; “The rebound for the USD at the start of this year supports our view that the market got ahead of itself in pricing in a weaker USD at the end last year.

Bank of America (BoA) sees a mixed outlook for the US currency; “Our view remains that central bank rate cuts, in soft landing, and US recoupling will eventually be positive for risk and negative for the USD. However, we have been warning of a choppy path, as we started the year with the markets priced to perfection.”

Political developments could also have an impact with the US New Hampshire Primary on Tuesday.

According to BoA; “As we have argued before, some of the Trump policies are positive for the USD, including tax cuts and tariffs. However, concerns about future pressure on the Fed can be USD negative. For now, we expect the first to dominate and the US elections to be a positive risk for the USD this year.”

Credit Agricole expects dollar support; “recent client meetings have highlighted that FX investors see a return of President Trump as a risk negative and USD positive development.”

On GBP/USD, Scotiabank added; “Trend signals are flat to slightly negative on the shorter-term studies but price action does have a mildly-negative look to it on the short-term chart, with GBP gains developing a bearish wedge pattern over the past few sessions (negative on a break under 1.2685/90). Resistance is 1.2735/40.”

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TAGS: Pound Dollar Forecasts