Pound to Dollar: "Current Levels Attractive to Stay Short GBP/USD" say Danske Bank

March 23, 2024 - Written by David Woodsmith

STORY LINK Pound to Dollar: "Current Levels Attractive to Stay Short GBP/USD" say Danske Bank

The Pound to Dollar exchange rate (GBP/USD) briefly jumped to 1-week highs at 1.2800 after the Federal Reserve policy decision, but failed to hold the gains.

A limited dovish shift by the Bank of England pulled the Pound lower and the dollar also fought back in global markets amid expectations of European interest rate cuts.

In this environment, GBP/USD retreated sharply to 2-week lows at 1.2660.

GBP/USD needs to hold support around current levels to avoid a slide to the 1.2600 area.

The Bank of England (BoE) held interest rates at 5.25% at the latest policy meeting, in line with consensus forecasts.

There was an 8-1 vote for the decision as Dhingra again voted for a rate cut while Haskel and Mann backed the case for no change and abandoned their previous call for a further hike in rates to 5.5%.

Forward guidance was little changed with Governor Bailey stating that; “We’re not yet at the point where we can cut interest rates, but things are moving in the right direction.”

Credit Agricole commented; “we believe that the GBP could be vulnerable to any evidence that BoE policymakers are now coalescing around the view for stable rates and/or rate cuts.”

According to Danske Bank, the overall meeting was relatively dovish, but expects that the BoE will decide to wait until June before cutting rates.

It added; “While we expect the UK economy to show further signs of weakness and inflation and wage growth to level off, we do not believe that the BoE will feel comfortable enough to opt for a rate cut at the May meeting.

It added; “Overall, we see relative rates as a negative for GBP and see current levels as attractive levels to stay short GBP/USD.”

Overnight, the Federal Reserve held interest rates at 5.50%, in line with consensus forecasts.

It again commented that it needed to be more confident that inflation was falling on a sustained basis before cutting interest rates.

As far as the “dot plot” of interest rate forecasts by committee members is concerned, the median figure was again for three interest rate cuts in 2024.

The committee was, however, divided with only a very narrow majority expecting three cuts and longer-term forecasts were revised slightly higher.

Fed Chair Powell noted that the inflation data for the first two months of the year was higher than expected, although he played down the impact.

Powell overall still expected that rates would be cut this year.

ING noted that the Fed blamed high inflation on seasonal grounds and added; “secondly, Chair Powell answered 'no' to a question of whether strong employment data would delay a Fed rate cut.”

The dollar posted sharp losses following the decision, but rallied on Thursday.

There was little impact from the US PMI data with a small monthly decline in the services-sector for March offset by a slightly stronger reading for the manufacturing sector.

There was a jump in existing home sales for February to an annual rate of 4.38mn from 4.00mn previously.

The Philly Fed manufacturing index improved declined slightly to 3.2 for March from 5.2 previously, although above consensus forecasts of -2.6.

Some of the underlying components were significantly weaker and there was also an easing of upward pressure on prices which will be of some relief for the Fed.

According to MUFG; “Overall, the dovish policy update from the Fed will help to dampen upside risks for the US dollar in the near-term, and should continue to support the outperformance of FX carry trades at the start of this year.”

Equity markets posted strong gains with US indices at fresh record highs while the FTSE 100 index posted an 11-month high with a 2.0% gain on the day.

Strength in equity markets will help underpin the Pound.

HSBC commented; “the USD’s initial nudge back higher might mean the market is belatedly digesting the shift higher in the dots beyond 2024, and the notable upward revisions to the Fed’s growth and inflation forecasts.”

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TAGS: Pound Dollar Forecasts