Pound Sterling Below 1.25 as Dollar Dominates Ahead of Fed Policy Decision

May 1, 2024 - Written by Frank Davies

STORY LINK Pound Sterling Below 1.25 as Dollar Dominates Ahead of Fed Policy Decision

The Pound to Dollar exchange rate (GBP/USD) dipped sharply from 2-week highs at 1.2565 on Tuesday to trade below 1.2500 as the dollar posted strong gains.

Federal Reserve policy guidance, US data and reaction in equity markets will be crucial for the Pound during Wednesday.

There will be substantial dollar gains and weakness in equity markets if Fed Chair Powell suggests that interest rates might need to raise interest rates with GBP/USD at risk of sliding to at least 1.24.

A balanced Fed stance and weak US data on the day would increase the potential for GBP/USD to move back above 1.2500.

The UK FTSE 100 index has been resilient despite the Wall Street sell-off which will provide some net Pound support.

Nationwide reported that UK house prices declined 0.4% for April compared with consensus forecasts of a 0.2% increase and followed a 0.2% decline the previous month.

The year-on-year data recorded a 0.6% increase after a 1.2% increase previously.

Nationwide's Chief Economist Robert Gardner commented; “The slowdown likely reflects ongoing affordability pressures, with longer term interest rates rising in recent months, reversing the steep fall seen around the turn of the year.”

Tom Bill, head of UK residential research at Knight Frank, noted the impact of re-mortgaging, but added; “We believe demand and house price growth will pick up later this year as a rate cut moves onto the horizon.”

The UK manufacturing PMI index was revised to 49.1 in the final reading from the flash figure of 48.7, although still a retreat from the 20-month high of 50.3 in March.

There was stronger upward pressure on prices with input and output prices increasing at the fastest rates since February and March 2023 respectively.

Rob Dobson, Director at S&P Global Market Intelligence, commented; “The UK manufacturing sector suffered a renewed downturn in April, as output and new orders contracted following short-lived rebounds in March. The sector is still besieged by weak market confidence, client destocking and disruptions caused by the ongoing Red Sea crisis.”

He added; “The news on the prices front is also worrisome for those looking for a sustainable path back to target (consumer price) inflation.”

The Federal Reserve will hold interest rates at 5.5% with guidance crucial.

ING noted that the dollar has retreated after the last three Fed policy meetings amid hopes for medium-term rate cuts, but the bank expects that the narrative will be different this time around.

Powell is likely to base his comments on remarks made in mid-April when he stated; "The recent data have clearly not given us greater confidence and instead indicate that it's likely to take longer than expected to achieve that confidence and proceed with rate cuts.

According to the bank; “Today, however, Jerome Powell will have to acknowledge that US price trends have reversed higher, activity is holding up well and that any easing this year will have to be delayed. And, at the moment, it is hard to argue against the market pricing out the one last 2024 Fed cut at some stage soon.”

Danske Bank is less convinced that there will be a hawkish stance and also notes that markets are positioned for hawkish rhetoric. It added; “We expect a slightly dovish market reaction with declining US yields.”

There are also important US data releases during the day with the ADP jobs report, JOLTs job-openings data and ISM manufacturing index.

ING commented; “We are interested in today's job opening, JOLTS, data. Here, any sharp decline - and also a decline in the quit rate - would suggest that excess labour demand is abating. This could prove a dollar negative on another day - but for today we think the FOMC will dominate.”

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TAGS: Pound Dollar Forecasts