Pound to Dollar Rate Near 1.28 on Mixed Sterling Sentiment

March 13, 2024 - Written by David Woodsmith

STORY LINK Pound to Dollar Rate Near 1.28 on Mixed Sterling Sentiment

The Pound to Dollar exchange rate (GBP/USD) found support close to 1.2750 on Tuesday and rallied to test the 1.2800 level and traded close to this level on Wednesday.

The dollar was resilient while the Pound was supported by firm risk conditions with the UK FTSE 100 index looking to build on Tuesday’s 1.0% gains.

A break above 1.2815/20 is needed to underpin the case for short-term GBP/USD gains towards 1.30.

Bank of America (BoA) maintains its year-end GBP/USD target of 1.37.

The latest UK data recorded a 0.2% GDP increase for January after a 0.1% decline the previous month.

According to ING; “A rebound in retail activity helped the UK economy bounce back in January, and the combination of falling gas prices and the anticipation of rate cuts suggests we should see an improvement in growth through 2024.”

BoA senior G10 FX strategist Kamal Sharma maintains a positive stance towards the Pound and points out that data is showing signs of improvement.

He added; "The labour market remains relatively robust. Real incomes have received a boost from a couple of angles: first of all headline inflation falling, and there will be a marginal kicker from the budget. We are expecting the national minimum wage to increase in April as well. So the headwinds have turned into tailwinds."

Althea Spinozzi, rates strategist at Saxo Bank considers the importance of the bond market; "If inflation remains sticky, or even rebounds, then the sell off in Gilts can accelerate on the basis that we have active quantitative tightening plus an increase of Gilt issuance."

Higher yields would tend to support the Pound.

Nevertheless, she added; “All that said, investor expectations could quickly reverse. The UK economy is far from strong and inflation is expected to dip below 2% in the coming months as energy prices continue to drop.”

Sterling will also be vulnerable if there is a shift in Bank of England (BoE) expectations with markets currently expecting a first rate cut in August.

According to Morgan Stanley "the chances of a second-quarter rate cut look severely underpriced to us.”

Credit Agricole remains cautious over the Pound outlook given that it considers it is overvalued based on current rate expectations.

According to the bank; “In particular, in our view it would take a fairly hawkish MPC message next week to encourage the UK rate markets to reassess their current rate outlook and thus give the GBP rate appeal a sorely needed boost. In the absence of that, however, the gap between the GBP and its rate spread vs the rest of the G10 currencies would remain a reason to be cautious on the GBP near-term outlook.”

There are significant US data releases on Thursday with retail sales, producer prices and jobless claims data.

According to Credit Agricole; “US PPI data will be important for sentiment in the coming week as the data set feeds into the Fed’s preferred measure of inflation, core PCE.

Bank of America expects a subdued retail sales reading; “Although real retail spending has held up well so far, the risk is that sticky services inflation will further shrink retail’s wallet share, to the extent that real spending also slows down.”

ING expects the firm CPI data reported on Tuesday will underpin the dollar. “The hot CPI should warrant a stronger dollar from these levels, and we think there is a good chance that the dollar will find more support in the coming days.”

The Federal Reserve will announce its latest interest rate decision next week with a focus on inflation and interest rate guidance.

According to MUFG; “At the very least we are expecting the Fed to display more concern over upside inflation risks even if their plans for the number of rate cuts this year remains unchanged.”

Commerzbank added; “If they give the impression that even June is shaky, the Dollar will continue to rise.”

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TAGS: Pound Dollar Forecasts