Pound Sterling Resilient vs Euro Despite Firm US Dollar

May 31, 2024 - Written by John Cameron

STORY LINK Pound Sterling Resilient vs Euro Despite Firm US Dollar

The Pound to Dollar exchange rate (GBP/USD) steadily lost ground on Wednesday and dipped below the 1.2700 level with lows at 1.2680 on Thursday.

There was a recovery to 1.2715 in Europe and the Pound was broadly resilient given external headwinds.

The dollar posted significant gains, underpinned to an important extent by losses in Treasuries and higher bond yields.

Risk appetite was also less confident which sapped support for the UK currency.

The FTSE 100 index dipped to 3-week lows below the 8,200 level with weaker equities also an important element in providing defensive support for the dollar.

ING discussed the dollar outlook and commented; “The question is whether this marks the start of a new mini-trend, or is just range-trading in a low-volatility environment. We tend to favour the latter, but will keep an eye on the key trends driving the former. In particular, the focus will be on whether the sell-off in Treasuries continues.”

Treasuries have been hampered by fears that the Federal Reserve will have to maintain higher interest rates for longer and could have a consider a hike in interest rates.

There has been a small shift in market pricing with the chances of a September rate cut dipping to just below the 50% level.

MUFG commented; “At the current juncture, we still believe it is unlikely that the Fed will deliver a much stronger signal next month that rates are now unlikely to be lowered his year. In light of current market pricing for one Fed rate cut it sets a high hurdle for the US dollar strengthen more significantly in the near-term.”

Overall conditions in the US economy will continue to be monitored closely, especially given the importance for Fed policy.

If the economy deteriorates, the overall narrative on interest rates could change quickly.

The Federal Reserve Beige Book report on economic conditions commented; “Overall outlooks grew somewhat more pessimistic amid reports of rising uncertainty and greater downside risk."

It added; “Tight credit standards and high interest rates continued to constrain lending growth.”

There was also evidence of a weaker labour market and inflation pressures were generally subdued; “Contacts in most Districts noted consumers pushed back against additional price increases, which led to smaller profit margins as input prices rose on average. Retail contacts reported offering discounts to entice customers.”

Overall risk conditions and equities will remain an important element with volatility levels also a key driving force.

According to Danske Bank, overall conditions should be broadly favourable; “The carry trade should continue to perform well, given the significant rate differentials among key G10 currencies and the improving carry/volatility ratios. The VIX Index remains near multi-year lows, and the MOVE Index has dropped to its lowest level since February 2022, indicating minimal risk of an imminent volatility surge across asset classes.”

These conditions should provide an element of Pound support and Danske has a; “slight tilt towards a weaker USD as we see downside risk to US yields and long USD positioning still being crowded.”

UK political developments have not had a significant impact with no evidence of a shift in dynamics during the first week of the UK General Election campaign.

The US election will gradually increase in importance for markets.

MUFG commented that betting markets are pricing in a greater chance of a Trump victory in the November Presidential election.

It added; “If the trend continues heading into the 2H of this year it could encourage further US dollar strength. The US dollar could strength on the back of building expectations for greater trade disruption and looser fiscal policy under a Trump second term even though there have also been reports that he would prefer/seek a weaker US dollar to boost the external competitiveness of the US economy.”

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Sterling Forecasts