HSBC Sterling Outlook: "Little justification for this (pound) performance (in 2024)"

March 21, 2024 - Written by David Woodsmith

STORY LINK HSBC Sterling Outlook: "Little justification for this (pound) performance (in 2024)"

The latest UK inflation data did not trigger a major shift in Bank of England (BoE) expectations or the Pound and markets are now looking to see whether the Federal Reserve policy statement and press conference can lead to a breakout.

The Pound to Dollar (GBP/USD) exchange rate found support below 1.2700 and traded just above this level.

The headline UK year-on-year inflation rate declined sharply to 3.4% for February from 4.0% and slightly below consensus forecasts of 3.5%.

This was the lowest headline rate since September 2021.

The core rate declined to 4.5% from 5.1% and marginally below market expectations of 4.6%.

Following the data, markets priced in around a 63% chance of a rate cut at the June policy meeting compared with 58% ahead of the data.

Markets do not expect a major change in BoE guidance at this week’s policy meeting.

Bank of America European economist Ruben Segura-Cayuela commented; "We expect no changes to the guidance. The minutes should reflect the continued need for more confidence but smaller tail risks."

He added; "The emphasis from here is likely to still be on sticky services inflation, ongoing and upcoming wage negotiations, and the pass-through of the upcoming increase in the national living wage."

MUFG expects the Pound will maintain a firm tone and added; “Overall the required caution on monetary easing will continue to support the pound, which remains the top performing G10 currency year-to-date along with the US dollar.”

HSBC remains generally cautious over the Pound outlook and commented; "We have argued there is little justification for this (pound) performance (in 2024) and believe these stretched levels of positioning are increasingly vulnerable to any potential dovish shift by the BoE."

The Federal Reserve will announce its latest interest rate decision after the European close and rates will be left on hold at 5.50%.

Markets will be sensitive to the latest “dot plot” of interest rate forecasts and will also pay close attention to Chairman Powell’s press conference for guidance on the rate outlook.

BBH noted the potential dynamics; “If the Fed turns less dovish, the USD rally will get turbocharged as Fed funds rate expectations adjust higher. In contrast, if the Fed dismisses the latest high US inflation readings as noise and powers forward with a dovish outlook, USD will come under renewed downside pressure.”

Scotiabank noted that the committee may not have enough information to revise the outlook significantly.

The bank added; “Markets are wary of the Fed sounding hawkish in some form so positioning/sentiment will be vulnerable to an outcome that leans neutral and sounds a bit dovish relative to expectations.”

Such an outcome would support the Pound but, according to Scotiabank; “sterling needs to extend through 1.2725/35 resistance—which has held advances over the past 24 hours—to strengthen.”

Rabobank also sees some scope for a limited dollar retreat; Tuesday’s short covering in the Treasury market indicates speculation that the market may have last week overplayed expectations of a hawkish tone from the Fed today. If that is the case, some post meeting profit-taking in long USD positions would be likely.

Nevertheless, it added; “That said, we expect a firm USD to prevail for some months.”

MUFG looked at the Fed outlook and, although it recognised that inflation data has been stronger than expected, there are other factors.

It noted that the Beige Book revealed a more cautious consumer stance with a shift away from discretionary spending.

It also noted that the labour market eased further and there was increasing evidence of increased difficulty for companies passing on higher costs.

In this context, MUFG commented; “So we expect a reasonably balanced Fed communication tonight, no matter what the median dots profile indicates for this year and that should help curtail further US dollar buying and weaken the current positive momentum (certainly the case of course if the dots profile is unchanged).”

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TAGS: Pound Dollar Forecasts