Why Pound Sterling Should Rise in April and then Fall in May

April 4, 2024 - Written by John Cameron

STORY LINK Why Pound Sterling Should Rise in April and then Fall in May

The Pound to Dollar exchange rate (GBP/USD)was unable to make any headway into the New York open, but received a significant boost after weaker-than-expected US business confidence data and strengthened to test the 1.2600 level.

Scotiabank noted the lack of progress earlier but added; “A move back above 1.2600 should see spot gains extend to the mid/upper 1.26s.”

Comments from Fed Chair Powell will be watched closely later in the day and there will be caution ahead of Friday’s employment report.

The ISM non-manufacturing index declined to 51.4 for March from 52.6 the previous month and below consensus forecasts of 52.8.

Employment remained in contraction territory while there was a significant moderation in the prices index for the month with the weakest reading since April 2020.

The dollar strengthened on Monday following better-than-expected manufacturing data and markets were, therefore, poised for a strong services-sector release which increased the net effect of the data.

The prices data also provided a glimmer of hope after a run of generally disappointing inflation data.

There were no major UK developments during the day, but markets were watching other asset classes nervously.

Gold prices are close to record highs while oil prices have posted a further advance to 5-month highs.

Stronger commodity prices will have a mixed impact on the Pound, but will provide an element of net support through backing for the FTSE 100 index.

Jane Foley, head of FX strategy at Rabobank, commented; "There is a feeling from gold and oil that there is a safe haven bid. But the question is why isn't this affecting the dollar more, because the dollar was off against just about everything yesterday.”

She added; "Just because of the attraction of yields, I would say the dollar will be the more attractive safe haven currency."

MUFG noted; “The rebound in the price of oil is an unfavourable development for the inflation outlook which will contribute to disinflationary pressure from last year’s energy price decline reversing further in the coming months if oil price gains are sustained.”

Credit Agricole notes that overall financial conditions have eased but considers that tighter conditions will be needed to help bring inflation under control.

It adds; “We therefore expect the Fed to welcome further USD appreciation from here.”

According to ING; “The next big story will be whether investors cut their expectations for 2024 Fed rate cuts to just two from three and the dollar needs another leg higher. Precious metals suggest not, but this week’s US jobs data will have a big say.”

Earlier, the US ADP data reported an increase in private payrolls of 184,000 for March after a revised 155,000 increase for February which was originally reported as 140,000.

The figure was above expectations of 150,000 and the strongest reading since August 2023.

After the ADP data, the chances of a cut in interest rates in June were cut to around 55% from 65% previously, but this moved back above 60% after the ISM data.

HSBC noted the importance of prices data; “with the Fed’s focus more on inflation than activity per se, perhaps the market simply has to wait for average hourly earnings and US CPI.”

SocGen noted the strong seasonal effect on the Pound in April. According to the bank; “The April-May effect is very strong for sterling, which has appreciated in April in 80% of years since 2004 and subsequently fallen by nearly the same level in May.”

It added; “April is also the reference month for the fiscal year. The local tax calendar therefore also exerts a strong FX impact, which provides an initial spring boost.”

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TAGS: Pound Dollar Forecasts