Pound to Dollar: Bank of England Sticks to Script, Sterling Posts One-Week Best

February 20, 2024 - Written by David Woodsmith

STORY LINK Pound to Dollar: Bank of England Sticks to Script, Sterling Posts One-Week Best

The Pound to Dollar exchange rate (GBP/USD) moved above the 1.2600 level on Tuesday.

As the dollar dipped lower, GBP/USD posted 2-week highs just below 1.2670 before settling just below 1.2650.

According to Scotiabank there is no sign of an imminent breakout with resistance around 1.2685; “Recent sterling losses towards 1.25 have attracted better demand and scope for significant GBP weakness looks limited in the context of some softening in the broader USD trend. Look for more range trading for now.”

The Bank of England (BoE) guidance was little changed with comments that rate cuts were realistic this year, but it was too early to consider a move with further progress on inflation needed.

In testimony to the Treasury Select Committee, BoE Governor Bailey was keen to play down the recession debate and play up the evidence of improving economic conditions.

According to Bailey; "There was a lot of emphasis again on this point about the recession, and not as much emphasis on the fact that there is a strong story, particularly on the labour market, actually also on household incomes."

Bailey did add that it was not unreasonable to expect that interest rates would be cut this year, but he refused to offer any hint on timing.

He added; "We're beginning to see things going in the right direction. We need to see more evidence of that and that's what will shape my vote going forwards."

According to the Governor; “We don’t need inflation to come back to target before we cut interest rates, I must be very clear on that, that’s not necessary. We’ll be looking for sustained progress on those things to reach that judgment about how long this period of restrictive policy needs to be.”

Deputy Governor Broadbent stated that interest rate cuts were possible this year. According to Broadbent; "In my view that is the more likely direction in which Bank rate is likely to move. But even if that proves to be the case, the timing of any adjustment can only depend on the actual evolution of the economic data."

External member Dhingra continued to emphasise downside risks to the economy and the need to cut interest rates.

According to the latest Reuters poll, consensus forecasts for the Bank of England is that interest rates will stay at 4.75% until the third quarter with three reductions to 4.50% by the end of the year.

Chris Hare, senior economist at HSBC commented; "We think it will take several more months for the Monetary Policy Committee to feel confident enough in disinflation in order to cut rates. We see the first Bank Rate cut this August."

Just under half of the respondents, however, forecast that the first cut would be in the second quarter.

According to ING; “The Bank of England is concerned that both wage growth and services inflation could be stickier and slower to come down, and that would potentially push back the timing of the first cut."

Caxton strategist David Stritch noted that there has been a steady shift in expectations surrounding UK rates; "It suggests rates at 4.5% by year end, only 0.75% off where we are now, given the optimistic pricing of 1.5% of cuts at the start of the year."

Expectations of higher yields will tend to support the Pound.

There has, however, also been a significant re-pricing of global interest rates as well.

Stritch added; "It shows how quickly that well of happy pricings has dried up. Despite this, sterling has not enjoyed much success, although these climbing expectations of end of year rates are a global phenomenon and so GBP is being eaten up by the differential."

There were no major US developments during the day with lacklustre conditions after Monday’s market holiday.

Treasuries were able to find some buyers and the 10-year yield declined to near 4.25% which curbed support for the US dollar.

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TAGS: Pound Dollar Forecasts