Pound to Dollar Outlook: Sterling Dips to test 1.2700 on Firm US GDP Data

January 26, 2024 - Written by Tim Boyer

STORY LINK Pound to Dollar Outlook: Sterling Dips to test 1.2700 on Firm US GDP Data

The latest UK data failed to provide further Pound support during Thursday.

US releases overall were solid, but the main market move was a slide in the Euro as the Euro to dollar (EUR/USD) exchange rate dipped sharply to below 1.0850 after the ECB policy statement.

The Pound overall was mixed on the crosses and Euro weakness dragged the Pound to Dollar (GBP/USD) exchange rate lower with a test of the 1.2700 level.

The UK CBI retail sales survey deteriorated further to -50 for January from -32 previously and below consensus forecasts of -30.

This was the weakest reading for three years and retailers expect no short-term improvement with the forecast at -50 for February.

According to Martin Sartorius, CBI Principal Economist; “Retailers reported a further deterioration in activity at the start of 2024. Year-on-year sales volumes fell at the fastest pace since the pandemic, and retailers anticipate a similar rate of contraction next month.”

He added; “Looking ahead, demand conditions in the sector will remain challenging as higher interest rates continue to feed through to mortgage payments and household incomes.”

Following the dismal retail sales data last week, there will be further reservations over consumer spending, although retail weakness is likely to be offset by strong spending on services.

Bank of England expectations will remain important.

According to Scotiabank; The relatively more aggressive repricing of BoE rate cut risks this year is underpinning the GBP.

Goldman Sachs added; "The UK growth momentum continues to improve, driven by the persistent expansion in the services sector, which differentiates the UK from the rest of Europe.”

Commerzbank noted positive PMI data on Wednesday; “This means that it is now well above the neutral level of 50, which certainly increases the chances that the British economy will see better times in the coming months. It also takes some of the pressure off the Bank of England to cut interest rates significantly again soon.”

Nevertheless, it added that positive developments may be priced in and added; “So why was the GBP unable to hold on to its gains? The latest surprise was just a continuation of the uptrend that started a few months ago and therefore does not allow for a real fundamental reassessment.”

Annualised US GDP growth slowed to 3.3% for the fourth quarter of 2023 from 4.9% previously, but above consensus forecasts of 2.0%.

The GDP prices index declined sharply to 1.5% from 3.3% previously and below market expectations of 2.3%.

Initial jobless claims increased to 214,000 in the latest week from a revised 189,000 previously and above consensus forecasts of 200,000 while continuing claims increased to 1.83mn from 1.80mn.

The data overall backed the narrative of a soft landing for the US economy and also increased hopes of a “goldilocks economy” with subdued inflation and solid growth.

Looking at the GDP data ING commented; “In theory that should be dollar-positive, but not necessarily risk-negative because the price data is far more important to the Fed right now.”

The reaction in bond markets was subdued with the 10-year yield holding around 4.14%.

According to Oxford Economics chief US economist Ryan Sweet; "The economy [fared] noticeably better than expected in the final three months of last year, reinforcing our view that market expectations for the Federal Reserve to cut interest rates as early as March is premature."

Pantheon Macroeconomics adopted a different slant; "The Fed will have to ease unless they have very good reasons to think the economy is about to re-strengthen or inflation somehow will rebound. We doubt those arguments can be made with confidence, so we expect the first easing in March or May."

Markets overall priced in a 47% chance of a March rate cut.

On GBP/USD, Scotiabank added; “intraday trading patterns are showing little risk of a significant change. Support is 1.2700/10. Resistance is 1.2775 within the broader 1.26/1.2825 trading range.”

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Dollar Forecasts