Pound to Dollar Mid Week Forecast: Narrow ranges will support Sterling

January 31, 2024 - Written by David Woodsmith

STORY LINK Pound to Dollar Mid Week Forecast: Narrow ranges will support Sterling

The Pound to dollar (GBP/USD) exchange rate dipped to 10-day lows on Tuesday following weaker-than-expected UK lending data and stronger-than-expected US job-openings data.

The Euro did manage to make net gains against the dollar and GBP/USD recovered to 1.2685 around the European close.

There was on-going caution ahead of Wednesday’s Fed policy statement.

Following the data, markets priced in just under a 40% chance that rates would be cut at the March meeting compared with close to 50% earlier in the day.

The US currency overall held a firm tone.

Marc Chandler, chief market strategist at Bannockburn Global Forex commented; “The Fed may feel more confident than they were in December that rates are restrictive enough to bring inflation down, but, they could also indicate that they are not in as much of a hurry as the market expects to cut rates.”

The latest UK data recorded an increase in mortgage approvals to 50,460 for December from a downwardly-revised 49,300 previously, but this was below consensus forecasts of 52,500.

Overall consumer lending was also weaker than expected with an increase of £0.4bn from £2.1bn the previous month as consumers continued to repay mortgages.

Bank of America (BoA) is still broadly constructive on the Pound on cyclical grounds, but it is still cautious over the overall outlook.

According to the bank; “Medium-term structural concerns are already showing up in terms of: (1) higher corporate leverage for £ non-financial credits, vs Euro Area equivalents; (2) a greater incidence of "zombies" across UK firms; and (3) conspicuously high UK insolvencies and more distress across the £ high-yield market.”

If stresses intensify, there is a risk that the Bank of England will have to cut interest rates to loosen financial conditions.

Credit Agricole noted capital inflows; “Our FX flow data points at banks, hedge funds and real money investors inflows, as well as corporates outflows. All in all, the GBP is no longer in overbought territory though.”

Westpac’s model is still constructive on the Pound and indicates that long positions are appropriate.

Goldman Sachs expects narrow ranges will support Sterling; “GBP tends to do especially well in an environment of moderating rate volatility and rising equity prices. And with other central banks like the ECB and Fed “catching down” to the BoE’s policy stance, we think the BoE is less of a reason to be bearish the currency.”

As far as US data is concerned, consumer confidence strengthened to 114.8 for January from a downwardly-revised 18.0 the previous month and close to consensus forecasts.

The JOLTS data recorded an increase in job openings to a 3-month high of 9.03mn for December from a revised 8.93mn the previous month and significantly above market expectations of 8.75mn.

There was, however, a further decline in the quits rate to a 3-year low which suggests that workers are less confident in the jobs market.

According to MUFG; “Without evidence of further weakness in the US labour market in the coming months, we are not convinced yet that the Fed will cut rates as soon as in March in light of the resilience of the US economy to higher rates. It partly supports our outlook for the US dollar to rebound in Q1.”

Treasuries overall were resilient after the data with the 10-year yield around 4.07%. There was still some positive impact from the lower than expected Treasury debt announcement on Monday.

MUFG noted; “The US Treasury now estimates that it will require USD760 billion in net borrowing for January-through-March, down from their previous estimate of USD816 billion released back in October. The lower than expected borrowing estimate triggered an adjustment lower in US yields which has weighed on the US dollar.”

According to ING the US currency should hold firm; "Looking ahead we would expect the dollar to be holding gains against European currencies over the coming days."

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TAGS: Pound Dollar Forecasts