Pound to Dollar: "No obvious fundamental drivers" for Sterling’s Downturn

February 28, 2024 - Written by Frank Davies

STORY LINK Pound to Dollar: "No obvious fundamental drivers" for Sterling’s Downturn

The Pound to Dollar exchange rate (GBP/USD) came under pressure in early Europe on Wednesday and hit 5-day lows close to 1.2620 as equities moved lower.

Scotiabank commented; “A mild bid for the USD generally yesterday developed a little more in overnight trade, largely reflecting weaker risk appetite as stocks in Asia and Europe (mostly) weakened.”

According to Kyle Chapman, FX markets analyst at Ballinger & Co "There is a tone of caution in the markets this morning ahead of the incoming high-impact U.S. data, which has guided sterling lower."

European currencies did recover later in the session with GBP/USD around 1.2650.

The vulnerable tone in equities was still a headwind for the Pound with the UK FTSE 100 index posting a loss of over 0.5%.

Given that Sterling’s sensitivity to risk is slightly greater than the Euro, the Pound to Euro (GBP/EUR) exchange rate retreated to near 1.1675.

According to Scotiabank; “There are no obvious fundamental drivers for sterling’s slide, beyond the shift into the USD amid weaker risk assets.”

It added; “The GBP has found firm support around the overnight low, however, and may be staging one of the stronger rebounds among its peers as the North American session gets underway.”

MUFG commented; “We are approaching month-end and that in itself could be the catalyst for a move with most financial news stories suggesting a bias for the US dollar to weaken.”

As far as the UK is concerned, markets were looking ahead to the UK budget next week.

Goldman Sachs economist James Moberly expects that potential measures next week will boost GDP by around 0.3% with an even split between increased supply and higher demand relative to supply.

An expansionary fiscal policy would have implications for Bank of England interest rates.

Rabobank commented; “Even a low level of fiscal stimulus would likely reinforce the consensus view that the BoE would likely be in a rush to cut interest rates.”

According to Goldman’s Moberly; "The modest change in the supply-demand balance at the margin reinforces our view that the BoE (Bank of England) will likely wait until June to cut Bank Rate."

As far as US data is concerned, GDP growth for the fourth quarter of 2023 was revised marginally lower to 3.2% from the flash reading of 3.3%.

There was an annual increase in consumer spending of 3.0% while the GDP prices index was revised slightly high to 1.7% from 1.5%.

Markets were looking ahead to the US PCE prices data on Thursday. Consensus forecasts are for a 0.4% monthly increase with an annual increase of 2.8% from 2.9%.

Deutsche Bank noted; “the fact that last January was 0.51% means that rolling out base effects should help the YoY rate edge down a tenth to 2.8%. However, it's the monthly print that will be all important.”

Higher than expected data would increase inflation concerns while there will be significant relief if the data comes in lower than expected.

Danske Bank FX and rates strategist Mohamad Al-Saraf noted; "Looking at the broader perspective, it's tight ranges as markets wait for the inflation data."

According to ING; “We remain of the view that evidence of resilient inflation in the Fed’s preferred measure of inflation will offer more support to the dollar into the end of the week.”

ABN Amro commented; “We expect the Fed to start cutting rates in June, with the risk somewhat tilted to earlier cuts.

It added; “Even with rate cuts starting next year, monetary policy is expected to remain restrictive throughout 2024 and even into 2025.”

A restrictive policy would tend to keep risk appetite in check, curbing Pound support, while the dollar would also secure net support.

Scotiabank was still doubtful whether the dollar would make much headway. It added; “Spreads have moved only marginally in the USD’s favour over the past month and the DXY is still trading above my estimated fair value. There may be little potential for USD gains to develop further, in other words.”

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Dollar Forecasts