Pound to Dollar: High Inflation Print Unlikely to Support Sterling

February 12, 2024 - Written by David Woodsmith

STORY LINK Pound to Dollar: High Inflation Print Unlikely to Support Sterling

US Dollar and Pound Strangled Ahead of Key Inflation Releases, GBP/USD Exchange Rate Holds Above 1.2600

The Pound to Dollar (GBP/USD) exchange rate was unable to hold a brief move above the 1.2650 level on Monday and drifted lower to 1.2615 after the New York open.

Position adjustment was a key element ahead of the US and UK data releases this week.

According to Scotiabank; “the potential for the USD to strengthen without the support of firmer data and higher yields looks quite limited at this point.”

It added; “The USD’s short-term tone hinges largely on the US January CPI report tomorrow. Slower inflation (which is expected) should strengthen the ceiling on the USD; sticky inflation will push back a bit harder on market pricing which is reluctant to give up in Fed May easing hopes, however, and give the USD a bit of a lift.”

Simon Harvey, head of FX analysis for Monex Europe, commented; "In the interim we keep floating around, and US CPI will determine how the dollar trades within those ranges."

Consensus forecasts are for a 0.2% increase in headline prices with the year-on-year inflation rate declining sharply to 2.9% from 3.4% due to favourable base effects.

Core prices are expected to increase 0.3% on the month with the annual increase edging lower to 3.8% from 3.9%.

According to ING; “Our economics team’s estimates are aligned with consensus for a 0.3% month-on-month core print, but we think the risks are skewed more towards a 0.2% than a 0.4% print. Accordingly, there are some downside risks for dollar, even though our base case is for a consensus print to leave few marks on the FX market.”

ING also looked at other data releases this week to trigger a reaction; “A weak retail sales print on Thursday may revamp expectations for a May rate cut, and take the dollar lower.”

It added; “That said, evidence for the jobs market and the lack of faster disinflation should still be enough to discourage aggressive dollar selling.”

There are very important UK data releases this week with the labour-market data on Tuesday, CPI inflation data Wednesday and GDP data Thursday.

According to Scotiabank; “It may be a bumpy ride for the pound this week.”

Bank of England expectations will be a key element, especially given the importance of carry trades in global markets.

While UK interest rates remain at elevated levels, there will be interest in buying the Pound against low-yield currencies.

XTB research director Kathleen Brooks commented; "Sterling is very much benefitting from carry. It's one of the best-performing carry trades in the G10 because our interest rates are expected to stay higher for longer."

The Pound will not benefit directly against the dollar given the high level of US interest rates, but there will be underlying Pound support, especially if volatility stays low.

According to Bank of America (BoA); “We continue expect the BoE on hold at 5.25% until Aug-24 and a cutting cycle of 25bp per quarter from there. The UK will be the last of the major central banks to start the cutting cycle.”

BoA currency strategist Kamal Sharma maintains a positive stance on the Pound; "With one of the highest policy rates in G10 and our expectation that the Bank of England will be the slowest to normalize policy, theory tells us that this should be fertile ground for FX outperformance."

According to Monex’s Harvey; "Net, we think the data will be negative for sterling, a lot of the headlines will be around recession, and the uptick in inflation pressures."

Rabobank sees potential vulnerability; “surveys suggests that the release of the UK Q4 GDP number later in the week could confirm a technical recession for the economy in the latter part of last year.”

Rabobank is also doubtful that a higher-than-expected inflation print would support the Pound.

The bank added that the number of long Pound positions leaves the currency vulnerable to profit-taking in long GBP positions.

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TAGS: Pound Dollar Forecasts