Pound to Dollar Rate Hits a 1-Month Best Despite Lacklustre UK Budget

March 7, 2024 - Written by James Fuller

STORY LINK Pound to Dollar Rate Hits a 1-Month Best Despite Lacklustre UK Budget

The UK budget failed to shift the dial on the Pound-Dollar exchange rate (GBP/USD) to any significant extent given that the headline measure of a cut in National Insurance rates had been flagged in advance.

The Pound to Euro exchange rate retreated to 1.1680 before stabilising around 1.1685.

The US data and Fed testimony had a greater market impact.

The data overall was slightly weaker than expected while Fed Chair Powell still expects that interest rates will be cut this year.

In this context, the Pound to Dollar (GBP/USD) exchange rate advanced to fresh 1-month highs just above the 1.2750 level.

ING commented; “Overall, we are mildly positive on sterling today and can see a scenario where GBP/USD presses strong resistance at 1.2800/25.”

ADP reported that US private-sector payrolls increased 140,000 for February, slightly below consensus forecasts of 150,000 while the January increase was revised slightly to 111,000 from 107,000 reported originally.

For job-changers, year-over-year increase in wages accelerated to 7.6% from 7.3% previously, the first increase in nine months.

The increase for job stayers slowed to 5.1% from 5.2% and the slowest gain since August 2021.

According to ADP chief economist Nela Richardson "Job gains remain solid. Pay gains are trending lower but are still above inflation.”

She added; "In short, the labor market is dynamic, but doesn't tip the scales in terms of a Fed rate decision this year."

The US JOLTS data recorded a small decline in job openings to 8.86mn from a revised 8.89mn the previous month, although slightly above consensus forecasts of 8.80mn.

The data overall suggested a softening in the labour market.

According to Fed Chair Powell; "If the economy evolves broadly as expected, it will likely be appropriate to begin dialling back policy restraint at some point this year," Powell said in remarks prepared for delivery at a hearing before the House Financial Services Committee. "But the economic outlook is uncertain, and ongoing progress toward our 2% inflation objective is not assured."

Powell added that there’s no reason to think the economy faces a significant near-term risk of recession.

Following the comments, markets continued to price in around a 70% chance of a rate cut in June.

Scotiabank considers that the dollar is looking vulnerable, especially given option pricing; “Losses in the USD this week are chipping away at the firm dollar veneer and its weaker undertone is further reflected in the continued softening in risk reversals priced around Bloomberg’s dollar index which are showing a small premium for dollar puts now for 1m tenors—the first time dollar puts have been favoured over calls since mid-2020.”

According to Danske Bank; “Consensus has revised the US growth outlook significantly higher over the past few weeks, leaving the door open for disappointments.

The bank pointed out that the monetary policy stance remains restrictive which is having an impact on the labour market.

It added; “Downside surprises in this week's labour market data could allow markets to price in a higher chance of a Fed cut in May, which would mark a near-term downside risk to our strategic bullish call on the USD.”

The Chancellor confirmed that the employee rate of National Insurance would be cut to 8% from 10% from April.

There were no changes to departmental spending plans.

The tax cuts should have some impact in supporting the economy, but the Office for Budget Responsibility (OBR) pointed to underlying weaknesses and there was no net improvement in the medium-term GDP growth forecasts.

MUFG commented; "Most of the main measures were already in the media over the weekend, there were no real surprises, and the government has played it relatively safe."

It added; "From an economic perspective that limits the near term stimulus for the economy, so doesn’t really alter expectations for Bank of England policy."

Elsewhere, the UK construction PMI index improved to 49.7 from 48.8 previously, above consensus forecasts of 49.0, and the strongest reading since August 2023.

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TAGS: Pound Dollar Forecasts