Pound to Dollar Outlook: GBP Dips Below 1.27 on USD Strength

January 30, 2024 - Written by David Woodsmith

STORY LINK Pound to Dollar Outlook: GBP Dips Below 1.27 on USD Strength

The Pound to Dollar (GBP/USD) exchange rate dipped to lows below 1.2670 before stabilising.

Market conditions were subdued on Monday, especially with no data releases.

Position adjustment ahead of this week’s central bank meetings was a key element with expectations of a more dovish Bank of England stance curbing Pound support, although the key element was a further Euro retreat in global markets.

European currencies were generally out of favour ahead of Wednesday’s Federal Reserve policy decision.

Scotiabank noted underlying caution; “Investors have had all sorts of reasons to stay on the sidelines over the past week or so between key data reports and central bank policy decisions so the wait for Wednesday’s FOMC decision is quite likely to keep trading subdued.”

The latest YouGov/Citi survey recorded a decline in 1-year inflation expectations to 3.5% in December from 3.9% in November.

Long-term expectations declined only marginally to 3.4% from 3.5%.

Citi economist Benjamin Nabarro expressed some reservations; "For now, the longer-term data in particular point to some lingering risks."

Nevertheless, he added; "However, with inflation now set to fall to 2% in the second quarter, we think the imminent danger is fading. For the MPC (Monetary Policy Committee), we think these data suggest scope for less pervasive inflationary aversion, and a more balanced view of the economic risks."

ING sees downside risks for the Pound from the BoE meeting; “Perhaps helping it has been the lack of communication from the Bank of England (BoE) given that investors have been keen to jump on any dovish hints from central bankers this year. However, there could be some dovish hints at Thursday's BoE policy meeting, where the Bank could drop its tightening bias (both in its voting pattern and statement).”

Jane Foley head of FX strategy at Rabobank commented; "The balance that the BoE will have to strike is 'how can we become a bit more dovish without being dovish'.”

She added; "It is quite possible we won’t have three votes for a hike, but they will really have to push the rhetoric that 'we will be on hold for some time'."

COT data, released by the CFTC recorded a further net increase in long, non-commercial Sterling positions to the highest level since September.

BNP Paribas commented; “we would be cautious about chasing the currency higher, given the build-up of long positioning".

The Federal Reserve will announce its interest rate decision on Wednesday with no change in rates expected.

Market expectations of a March Fed rate cut edged lower to just below 50%.

Scotiabank commented; “Communication from the Fed this week is key for the USD. Pushback on March rate cut pricing (12-13bps priced in), in line with comments from policymakers prior to the Fed blackout, should give the USD a lift.”

According to ING; “With seasonals staying strong for the dollar through January and February, we think it is too early to make the case for a resumption of the dollar bear trend just yet.”

From a longer-term perspective, markets will also be monitoring political trends, especially after reports that Trump, if elected in November for a second term, would impose heavy tariffs on imports from China and this could hamper risk appetite.

According to Commerzbank; “Donald Trump's preference for a robust foreign trade policy based on tariffs, among other things, could lead to a resurgence of trade disputes between the US and the EU.”

It added; “However, it cannot be said that there would be a U-turn in US policy under Trump. Rather, he would probably only accelerate trends that are already in place; a certain move away from Europe and an increased US focus on the Asian region is to be expected with any future administration.”

On GBP/USD, Scotiabank added; “Underlying trend signals are flat on the intraday and daily DMIs. Intraday support is 1.2670, ahead of 1.2600. Resistance is 1.2775 and (strong) 1.2825.”

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TAGS: Pound Dollar Forecasts