Pound to Dollar: FX Markets Continue to Fret Over US Inflation Trends

March 15, 2024 - Written by David Woodsmith

STORY LINK Pound to Dollar: FX Markets Continue to Fret Over US Inflation Trends

The Pound to Dollar exchange rate (GBP/USD) edged higher to 1.2820 ahead of the New York open before drifting lower.

GBP/USD retreated further to 1.2760 after the US data releases as markets continued to fret over US inflation trends.

The overall market moves were still relatively limited with markets focussing on the Federal Reserve and Bank of England policy meetings next week.

Neither central bank is expected to change interest rates, but the overall guidance will be extremely important for currency sentiment.

According to ING; “This is very much a bit of an in-between week, just waiting for the central bank meetings next week to see what happens."

Overall risk appetite held steady, although equities were unable to make further headway on the day which curbed the potential for further Pound buying.

The overall US data releases were mixed with slightly stronger-than-expected producer prices data and firm labour-market data offset by a weaker-than-expected reading for retail sales.

Headline US retail sales increased 0.6% in February compared with consensus forecasts of a 0.8% increase and the January figure was revised to a decline of 1.1% from the fall of 0.8% reported originally.

Underlying sales were also slightly below expectations with a 0.3% increase after a revised 0.8% decline the previous month.

The control group was unchanged after a 0.3% decline previously.

Producer prices increased 0.6% for February compared with consensus forecasts of 0.3% with the year-on-year increase of 1.6% from 1.0% previously.

Core prices increased 2.0% over the year, marginally above expectations of 1.9%.

The producer prices data will maintain reservations over near-term inflation trends.

HSBC commented; “The market was able to shrug off the modest upside surprise on core CPI, but a hawkish PPI would add to the narrative of sticky inflation.

Initial jobless claims declined slightly to 209,000 from a downwardly-revised 210,000 the previous week.

There was a net increase in continuing claims to 1.81mn from 1.79mn, although the overall series was revised lower due to benchmark revisions.

The overall data flows remained broadly positive with markets continuing to monitor Bank of England expectations closely.

The UK Royal Institute of Chartered Surveyors (RICS) house price index improved to -10% in February from a revised -19% the previous month. This was in line with consensus forecasts and the strongest reading since October 2022.

Underlying metrics were mixed, although new instructions to sell increased at the fastest rate since October 2020.

Simon Rubinsohn, RICS chief economist, commented; “The February RICS survey provides some grounds for encouragement around the sales market with not just buyer interest staying positive for the second successive month, but also the uplift in new instructions to agents."

He still expressed some reservations over near-term prospects and added; “the near-term outlook is still somewhat cautious reflecting, in part, the suspicion that the recent easing in mortgage rates is likely to stall on the back of ongoing uncertainty about the timing and speed of interest rate reductions.”

HSBC noted; “While the impact of this morning’s data on UK rate expectations has been modest, it seems to have energised the FX market a little more, with GBP pushing higher

ING commented; “The Bank of England appears to be in less of a rush than the ECB for sure and also the Fed. Markets have kind of cemented their view that they will cut in August. Unless we see big deviations in the data I think they'll keep pricing that in."

Rabobank maintains a constructive Pound outlook; “We expect that the interest rate differential, signs of an improving UK economic outlook combined with the prospect of a dull UK election and a relatively stable political backdrop should provide moderate support for the Pound.

It added; “We see Cable recovering to the 1.3000 area on a 12-month view, though we see scope for dips on a one-to-three-month view on bouts of broad-based USD strength.”

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TAGS: Pound Dollar Forecasts