Dovish Fed Comments Would Boost Pound to Dollar Exchange Rate

July 10, 2024 - Written by John Cameron

STORY LINK Dovish Fed Comments Would Boost Pound to Dollar Exchange Rate

The Pound to Dollar exchange rate (GBP/USD) hit 3-Week highs near 1.2850 on Monday, but failed to hit 4-Month highs at 1.2860 and retreated to near 1.2800 on Tuesday.

The outlook for interest rates on both sides of the Atlantic will be crucial for exchange rates with scope for Pound gains if momentum for a September Fed rate cut continues to build.

Markets will, therefore, be scrutinising comments from central bank speakers closely with Federal Reserve Chair Powell due to testify to Congress on Tuesday.

According to MUFG; “We see the dollar as vulnerable to further selling today given the macro backdrop and the signals from FOMC members over concerns that the labour market data could be over-stating strength.”

UoB added; “the risk for GBP remains on the upside, and the level to watch is 1.2860.”

In comments on Monday, Bank of England MPC member Haskel was still concerned over underlying UK inflation pressures.

According to Haskel; "I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably."

Haskel will leave the MPC in August and has maintained a hawkish policy stance.

In this context, ING commented; “Tomorrow’s speech by Chief Economist Huw Pill, who is a more neutral member, should shed a brighter light on the current BoE stance ahead of key CPI data next week.”

The latest British Retail Consortium (BRC) data recorded a 0.5% annual decline in like-for-like retail sales for June after a 0.4% increase previously and compared with consensus forecasts of a 0.2% increase.

BRC Chief Executive Helen Dickinson commented; “Retail sales performed poorly in June as the cooler weather during the first half of the month dulled consumer spending.”

According to Linda Ellett, UK Head of Consumer, Retail & Leisure, KPMG; “Despite pressure on household finances easing, with petrol and energy costs and shop price inflation all continuing to fall, consumers remain incredibly reluctant to take the brakes off of their spending.”

Data from Barclays also noted weakness with spending on credit and debit cards declining 0.6% in the year to June, the first decline since February 2021 with cold weather cited as a factor.

As far as the Federal Reserve is concerned, markets are pricing in just over a 75% chance of a September rate cut.

At this stage, Bank of America expects a first rate cut in December, but added; “net softness in the jobs report should keep expectations of a cut this year in market pricing and should keep September live.”

Ray Attrill, head of FX strategy at National Australia Bank commented; "All ears will be on how Powell communicates the risks between stubborn inflation and unnecessary labour market deterioration."

According to ING; “We stand by our view that if there is any deviation from the recent narrative, it should be on the dovish side, as Powell might see the June Dot Plot revisions as too hawkish and want to fine-tune communication on the back of recent data.”

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TAGS: Pound Dollar Forecasts