Pound Sterling Creeps Higher vs Dollar as US Yields Retreat

March 2, 2024 - Written by Ben Hughes

STORY LINK Pound Sterling Creeps Higher vs Dollar as US Yields Retreat

Thursday’s UK and US economic data releases failed to have a major impact, although slightly softer than expected US jobless claims data did trigger limited dollar selling as US yields declined.

The Pound to Dollar (GBP/USD) exchange rate edged higher to 1.2670.

GBP/USD will need substantial month-end dollar selling to make a concerted attack on the crucial 1.2700 level.

UK mortgage approvals increased to 55,200 for January from an upwardly-revised 51,500 previously. This was significantly above consensus forecasts of 52,000 and the strongest reading since October 2022.

There was also a strong increase in consumer credit of £1.88bn from £1.26bn previously.

The overall increase in net lending, however, was held to £0.8bn due to a significant increase in mortgage repayments.

Ashley Webb, UK economist at consultancy Capital Economics, commented; “January’s money and credit figures suggest the drag on consumer spending and the housing market from higher interest rates is easing, which suggests an economic recovery, at least in some sectors, has already begun.”

Capital Economics still expect a sharp decline in interest rates this year and noted; “Despite renewed inflation concerns pushing interest rate expectations and gilt yields higher, our forecast that CPI inflation will fall below 1pc later this year makes us think that the markets are wrong to price in interest rates falling from 5.25pc now to only 4pc by the end of next year.

It added; “We think rates will fall to 3pc, although the risk is that the Bank of England starts cutting rates later than our forecast of June.”

The Treasury announced on Thursday that Clare Lombardelli will succeed Ben Broadbent as BoE Deputy Governor for monetary policy from the beginning of July.

Simon French, chief economist at Panmure Gordon commented; “It is quite a hawkish appointment given that Lombardelli was a well-known inflation hawk within the Treasury in 2021/22 during the debate on transitory inflation.”

He added; “At the margin (and only at the margin) this reduces the chances of a rapid BoE easing cycle."

The US PCE prices index increased 0.3% for January with the year-on-year increase declining to 2.4% from 2.6% and in line with consensus forecasts.

Core prices increased 0.4% on the month with the year-on-year rate edging lower to 2.8% from 2.9% and both metrices were in line with market expectations.

On a 12-month basis, services prices rose 3.9% while goods were down 0.5%.

Markets have been expecting a strong reading for the PCE prices data and market expectations of a Federal Reserve interest rate cut at the May policy meeting have also declined to below 20%, limiting the scope for further adjustment.

Stephen Gallagher, chief U.S. economist at Société Générale commented; “Overall, [the report] is meeting the expectations, and some of the worst fears in the market weren’t met. The key is we’re not seeing the broad nature of increases that we had been more fearful of.”

Scotiabank added; “This is an important data point for the Fed but policy makers are unlikely to get too alarmed by one month’s data point picking up and markets may have already discounted the expected gain in core PCE to some extent at least.”

As far as labour-market data is concerned, initial jobless claims increased to 215,000 from 202,000 the previous week and above consensus forecasts of 209,000 while continuing claims increased to 1.91mn from 1.86mn.

This was the second-highest reading for continuing claims since the pandemic.

US Treasuries gained ground after the data with the 10-year yield back below 4.30%.

The dollar overall retreated in global markets with USD/JPY back below 150.0, although European currencies were unable to draw significant support.

ON GBP/USD Scotiabank commented; “That suggests spot will have to move significantly from current levels in order to boost directional momentum. More choppy range trade is the likely in the short run as the market seeks a stronger sense of direction. Support is 1.2600/15. Resistance is 1.2700/15.”

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TAGS: Pound Dollar Forecasts