GBP to USD Outlook: Pound Sterling Braced for Major Transatlantic Event Risk

March 20, 2024 - Written by John Cameron

STORY LINK GBP to USD Outlook: Pound Sterling Braced for Major Transatlantic Event Risk

The Pound has been unable to make headway against major currencies on Tuesday and will be vulnerable to further losses if Wednesday’s UK inflation data is weaker than expected.

The dollar has also held a firm tone with the currency index strengthening to 2-week highs.

In this environment, the Pound to Dollar (GBP/USD) exchange rate dipped to 2-week lows just below 1.2670 before recovering to near 1.2700.

Overall volatility remained low which should help cushion the Pound to some extent.

Scotiabank noted; “JPM’s Global FX Volatility index has reached a 3-year low this week and investors appear to be positioning for a continuation of recent trends favouring short vol trades—which suggests a strong belief that the broad, choppy range trade in spot will continue.”

The narrative will change if interest rate decisions and data don’t meet expectations.

The dollar drew initial support from gains against the yen following the Bank of Japan policy decision with the yen losing ground despite the Japanese central bank ending negative interest rates.

According to Scotiabank; “The USD may need more help from US yields—with the FOMC coming into view now—to sustain the firmer tone.”

As far as US data is concerned, housing starts increased to an annual rate of 1.52mn for February from a revised 1.37mn previously and above consensus forecasts of 1.43mn while building permits also edged higher.

There are expectations of a relatively hawkish stance by the Federal Reserve at Wednesday’s policy meeting, especially given that the recent inflation data has generally been higher than expected.

The latest forecast of interest rates by individual committee members will be watched closely.

At the last update in December, the median projection was for three interest rate cuts in 2024.

There is speculation that this median forecast will be reduced to two cuts for the year.

ING commented; “With the market now just pricing 68bp of Fed cuts this year, the FOMC could prove a mild dollar negative. For the time being, however, the risk of the Fed Dots shifting to just 50bp of cuts this year could continue to prompt some modest dollar short covering.”

Even if the dollar gains slightly on the Fed decision, Danske Bank added; “given current market expectations, USD weakness is likely in the next 1-3 months if our prediction that the Fed will be comfortable initiating rate cuts from May is correct.”

Longer-term Danske considers dollar gains are likely, especially as it expects volatility to increase.

The UK will release the latest consumer prices inflation data on Wednesday.

Consensus forecasts are for the headline annual rate to decline to 3.5% from 4.0% while the core rate is forecast to retreat to 4.6% from 5.1%.

There is the potential for an element of position adjustment ahead of the inflation data, especially with long Sterling positions at record highs according to the latest COT data.

According to Lloyds Bank; “We expect the overall rate to drop to 3.3% from 4.0% in January. That would take it to its lowest since late 2021. Even more positively, the decline is predicted to reflect a fall in the core rate to 4.4%from 5.1% rather than just lower energy and food prices.”

It added; “Our estimate is slightly below the consensus and the Bank of England’s forecast. So it would support the case for an interest rate cut but is unlikely to be enough to prompt and immediate change in policy.”

Kyle Chapman, FX market analyst at broker Ballinger commented; “A consensus CPI figure should be just strong enough to keep the BoE's messaging on hold and we suspect that the risks are tilted to the upside for sterling from an uneventful policy statement."

Looking at the GBP/USD technical picture Scotiabank added; “Short-term price action suggests a potentially positive response to that test in the form of a bullish “hammer” pattern, however. Resistance is 1.2745/50. Support below 1.2675/80 sits at 1.2600/10.”

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TAGS: Pound Dollar Forecasts