Pound to Dollar Rate "Dip in Cable Retains a Corrective Look" say Analysts

March 12, 2024 - Written by David Woodsmith

STORY LINK Pound to Dollar Rate "Dip in Cable Retains a Corrective Look" say Analysts

The Pound to Dollar exchange rate (GBP/USD) lost the 1.2800 level after the UK wages data and dipped further after stronger than expected US consumer prices data.

GBP/USD dipped to near 1.2750 in immediate reaction to the data and after a brief recovery, there was a further test of 1.2750 after the Wall Street open with choppy trading conditions.

The dollar overall was significantly higher after the data and GBP/USD will struggle to regain momentum unless there is a very strong UK GDP report on Wednesday.

According to ING; “We were expecting this to be the week for a stabilisation or moderate recovery in the dollar, and we continue to see an upward-tilted balance of risks for the USD in the coming days.”

US consumer prices increased 0.4% for February, in line with consensus forecasts, although the year-on-year inflation rate edged higher to 3.2% from 3.1% and above expectations of 3.1%.

Energy prices increased 2.3% on the month, but still registered a 1.9% annual decline.

Core prices increased 0.4% on the month compared with forecasts of 0.3% with the year-on-year rate declining only slightly to 3.8% from 3.9% and compared with expectations of 3.7%.

Shelter prices increased 0.4% on the month after a 0.6% increase previously with a smaller increase in rents which will come as a relief after a strong increase last month.

There were expectations that another elevated reading would undermine the chances of a Fed rate cut in the first half of 2024.

The shift in expectations was, however, relatively limited with traders still pricing in around a 65% chance that the Federal Reserve would cut interest rates at the June policy meeting, from 70% the previous day.

Treasuries posted net losses with the 10-year yield around 4.15%.

UK equities were resilient with the FTSE 100 index holding a gain of close to 1.0% on the day.

The Fed will still be concerned over underlying inflation dynamics.

The US NFIB small-business confidence index retreated to a 9-month low of 89.4 for February from 89.9 previously and compared with expectations of a small increase.

There was a further softening of the labour market, but companies were more concerned over inflation.

Scotiabank added; “price action rather suggests markets are happy to fade moderate USD gains for now, with the broader USD tone remaining soft. Any CPI-led gains in the USD may be limited.”

Credit Agricole considers positioning could be important; “The USD has been on the back-foot ahead of the CPI data, suggesting that any upside inflation surprises could have a stronger positive impact on the currency than any unexpectedly soft print.”

Earlier in the day, the UK labour-market data was released on Tuesday with the main focus on wages given the importance for inflation expectations and the Bank of England stance on interest rates.

The headline annual increase in average earnings slowed to 5.6% from 5.8% previously and slightly below consensus forecasts of 5.7%.

There was a similar picture for underlying earnings with a marginal slowdown to 6.1% from 6.2% previously.

The UK inflation debate will continue with significant dilemmas for the Bank of England.

Bank of America strategist Mark Capleton, commented "By a quirk of base effects, the April energy price cap reduction might mean UK inflation beats the euro zone in the race to return to target.”

Nevertheless, he added; “The UK's underlying inflation picture is considerably less benign."

Scotiabank commented on the release; “Jobs data showed some softening in labour markets. Easing pay pressures and a cooling labour market will be welcomed by policymakers.”

Money markets have fully priced in a 25 basis points rate cut from the BoE by August with around a 50% chance by June.

Scotiabank added; “GBP losses from last week’s high have extended a little further today but the dip in Cable retains a corrective look (bull flag potential), implying that gains could resume on a rebound back above 1.2815/20 intraday.”

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TAGS: Pound Dollar Forecasts