Pound Sterling to Dollar Rate Consolidates near 13-Month Best

August 23, 2024 - Written by David Woodsmith

STORY LINK Pound Sterling to Dollar Rate Consolidates near 13-Month Best

After sliding on Tuesday, the dollar has caught its breath in global markets, but secured only a limited correction with the dollar index (DXY) slightly above 8-month lows.

The Pound to Dollar (GBP/USD) exchange rate posted sharp gains to 13-month highs fractionally above 1.3050 before a limited correction to 1.3020.

US currency sentiment remains notably dovish on expectations of multiple Fed interest rate cuts over the next few months while bond yields have moved lower.

Chris Weston, head of research at Pepperstone commented; "The reduced yield premium in the U.S. Treasury market has been a clear factor driving the USD lower."

He added; “As we can see in so many USD pairs of late, the USD just can't find a friend in the market and is in free fall."

ING added; “The DXY sell-off is starting to pick up a little momentum as traders look to jump on possibly an important new market trend.”

US data and Fed expectations will remain key elements for markets and a key question is whether markets have moved too far, too fast.

In this context, there will be significant caution ahead of Fed Chair Powell’s speech to the Jackson Hole symposium on Friday.

Scotiabank commented; “Whether Powell is dovish enough to drive more USD weakness or justify still quite elevated Fed easing expectations reflected in swaps remains to be seen.”

At this stage, markets are pricing in just below a 70% chance of a 25 basis-point rate cut with close to a 30% chance of a 50 basis-point move.

On Tuesday, Fed Governor Bowman stated that should incoming data show inflation is moving sustainably towards target then it will be appropriate to gradually lower interest rates to avoid becoming overly restrictive.

She was still cautious and preached the need for patience while she still saw upward risks to inflation.

The Pound will be more vulnerable to a correction if the dollar can recover ground.

According to Scotiabank; “A push back under 1.2890/00 would signal a more significant setback.”

Federal Reserve minutes from July will be released on Wednesday with markets looking for further evidence on the potential scope and timing of interest rate cuts.

The US will also release annual revisions to the payrolls data with expectations that previous estimates could be revised down by close to 1 million jobs.

Domestically, the government borrowing requirement increased to £3.1bn for July from£1.3bn the previous year and the highest July figure since 2021 as spending pressures remained strong.

For the first four months of fiscal 2024/2025, the deficit declined slightly to £51.4bn from £51.9bn the previous year.

The data will maintain expectations of a tight budget in October to plug the black hole and represent a potential headwind for the Pound.

Capital Economics UK economist Alex Kerr commented; “We still think that she will look to raise an additional £10bn a year via higher taxes in the Budget and increase borrowing by around £7bn a year.”

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TAGS: Pound Dollar Forecasts