Pound to Dollar Rate End-of-Week Forecast: Is 1.28 Next?

February 2, 2024 - Written by John Cameron

STORY LINK Pound to Dollar Rate End-of-Week Forecast: Is 1.28 Next?

BoE Mirrors Fed Reluctance to Endorse Interest Rate Cuts, GBP/USD Rallies to 1.2700

The Bank of England (BoE) Monetary Policy Committee (MPC) held interest rates at 5.25% at the latest policy meeting which was in line with consensus forecasts.

The BoE and Federal Reserve have rejected market pricing for interest rates and relatively narrow ranges prevailed.

The Pound to Dollar (GBP/USD) exchange rate dipped to 1.2625 ahead of the rate decision before a rebound to 1.2700 as the dollar also faded.

There was a 6-3 vote for the decision as Haskel and Mann continued to back a further interest rate increase while the Dhingra voted to cut rates to 5.00%.

Haskel and Mann remained concerned over inflation pressures while Dhingra was more concerned over the risk of overkill.

Bank Governor Bailey noted that there had been welcome progress on inflation, but the committee needs evidence that inflation would decline to 2% on a sustainable basis before sanctioning rate cuts.

In this context, Bailey warned that inflation would decline to 2% during the second quarter, but would be likely to increase during the second half.

The bank expects rate cuts this year, but considers that market pricing is too aggressive.

Overall rhetoric was broadly similar to comments from Fed Chair Powell overnight.

The bank was slightly more positive on the economic outlook, although growth is still forecast to be anaemic.

JPMorgan global market strategist Matthew Landon commented; "While things do still remain highly uncertain, we think that the outlook for the UK economy is far better than it was just a matter of months ago."

He added; "Markets have also adapted to the better UK growth picture since the start of the year, pricing out around 70 basis points worth of cuts for 2024.”

Markets now expect just under a 50% chance of a May rate cut.

MUFG commented; “we are sticking with our forecast for the BoE to cut rates in May but acknowledge that there is a higher risk that the first cut could be delayed a little until June or August.”

US initial jobless claims increased to 224,000 in the latest week from a revised 215,000 previously.

Continuing claims also increased sharply to a 9-week high of 1.90mn from 1.83mn previously.

The ISM manufacturing index improved to 49.1 for January from 47.1 previously. This was above consensus forecasts of 47.2 and the strongest reading since November 2022.

The new orders index also strengthened into expansion territory above 50.0 with production also marginally positive.

There was, however, a slightly faster rate of employment contraction.

Prices increased for the month for the first time since May 2023.

With mixed data releases, there was little net change in Federal Reserve pricing with around a 36% chance of a rate cut at the March meeting.

The Fed will need some convincing evidence to back a near-term rate cut, but US yields declined on Thursday with sapped dollar support.

According to HSBC; “Two CPI releases and one PCE deflator release could see that probability shift again, but it seems the Fed will need some dovish surprises to make March a central case candidate for a cut.

Attention will now focus on Friday’s employment report which could trigger another jolt in expectations.

The data will be particularly important given that Fed Chair Powell stated that the Fed would be on alert for any sharp deterioration in the labour market.

Consensus forecasts are for an increase in non-farm payrolls of 185,000 after a 216,000 increase the previous month.

The unemployment rate is expected to edge higher to 3.8% from 3.7%.

HSBC added; “the real waiting game is for tomorrow’s US employment report.”

According to ING; “Sterling has ticked higher in response to the less-than-dovish statement. We doubt it needs to embark on a major rally, however, given that we think UK inflation will ultimately play catch-up with the disinflation trends seen in the US.

It added; “a strong dollar environment can keep GBP/USD near the 1.26/27 region this quarter.”

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TAGS: Pound Dollar Forecasts