Strong July Pound Sterling Buying Stalls as Traders Focus on Bank of England

July 31, 2024 - Written by John Cameron

STORY LINK Strong July Pound Sterling Buying Stalls as Traders Focus on Bank of England

The Pound to Dollar exchange rate dipped to 2-week lows just below 1.2810 on Monday before a recovery to 1.2850.

According to Scotiabank; “Regaining 1.29 intraday would be a positive but it is possible that the soft undertone will persist for another few days and perhaps extend to 1.2775 or so before steadying.”

Fiscal and monetary policy developments will be key elements this week with the Bank of England (BoE) and Federal Reserve policy decisions.

There was strong Pound buying during the first three weeks of July with global investors taking a more upbeat stance on the outlook and pushing long positions to record highs.

On Monday, Chancellor Reeves stated that there was a £22bn black hole in government finances with Reeves announcing cuts in investment spending, although public-sector wage recommendations were agreed which will give a significant real-terms increase.

Following the statement, there were increased concerns over potential tax increases in the October budget. Markets will also debate whether positive Sterling sentiment is justified and sustainable.

Credit Agricole commented; “The statement could add yet another headwind to the UK growth outlook in H224 and thus cut short investors’ ‘honeymoon’ period with the GBP.”

The bank added; “The GBP reached record long positioning thanks to some further buying interest last week. Our FX flow data points at banks, corporates, hedge funds and real money investors inflows. All in all, the GBP remains in overbought territory.

Investment banks expect a BoE interest rate cut this week and markets are now pricing in around a 60% chance of a move from close to 50% late last week.

ING commented; “We expect a 25 basis-point rate cut from the Bank of England this week and if we’re right, that could take 10-year yields below 4% and present a clear downside threat for GBP/USD.”

There are very strong expectations that the Fed will hold interest rates at 5.50% on Wednesday with guidance expected to be the key element.

Barclays commented; “At the press conference, we expect Chair Powell to hint at a September cut by mentioning the FOMC's improved confidence that inflation is moving sustainably to 2%. However, we expect him to emphasize that the FOMC will make decisions meeting-by-meeting.

The US will release the latest consumer confidence and job openings data on Tuesday which will be important for dollar sentiment.

ING commented; “Over recent weeks there has been growing momentum – aided by second-quarter earnings reports – that the US consumer is finally rolling over. A softer confidence figure today will add to the view that the Fed will want to "sustain the expansion" with a September rate cut.”

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TAGS: Pound Dollar Forecasts