Pound to Dollar Consolidates: Contrasting Central Bank Talk Triggers Further Pound Buying

August 26, 2024 - Written by Frank Davies

STORY LINK Pound to Dollar Consolidates: Contrasting Central Bank Talk Triggers Further Pound Buying

The dollar dipped sharply following Fed Chair Powell’s comments on Friday while Bank of England Governor Bailey continued to preach caution over the potential for notable rate cuts.

The Pound to Dollar (GBP/USD) exchange rate hit 27-month highs at 1.3230 before a limited correction to 1.3200 on Monday.

UK markets are closed for the day which will limit activity.

Risk appetite and interest rate expectations will remain key elements for the Pound over the next few days.

According to Bailey; “Recent experience leads me to be cautiously optimistic that inflation expectations are better anchored as a result of the regimes we have in place.”

He added; “The second-round inflation effects appear to be smaller than we expected. But it is too early to declare victory.”

Markets expect one further 25 basis-point rate cut in November.

In his keynote speech to the Jackson Hole symposium, Fed Chair Powell commented; "The time has come for policy to adjust. The direction of travel is clear."

This was very clear guidance from Powell and confirmed that interest rates will be cut in September.

Tapas Strickland, head of market economics at National Australia Bank commented; “Although Fed officials had sounded increasingly dovish, Powell on Friday used stronger language than his peers when delivering his keynote speech.”

He added; "Importantly, there was a notable absence of caveats such as 'gradual/gradualism', effectively keeping the door open to larger rate-cut increments, which is likely what excited markets.”

The 10-year yield was close to 20-month lows below 3.80%.

There is still an element of uncertainty over the size of the rate cut.

Following Powell’s comments, traders priced in a 63% chance of a 25 basis-point cut and 37% of a 50 Basis-point cut.

The dollar could, therefore, rally if there is stronger backing for a smaller rate cut or equities come under pressure.

In this context, US employment data will be a key figure at the end of next week.

Markets also expect a total of 100 basis points in easing by the end of 2024.

Nordea is concerned that markets are too complacent; “Equity risk premiums remain historically low and bond term premiums are close to zero with an inverted yield curve. The credit market reflects close to no default risk, and the volatility market shows little reason to expect large swings in stocks.”

The bank added; “Without an economic slowdown the US dollar negativity looks very overdone, and even in the case of a slowdown it would have to be completely isolated to the US economy for the interest rate differential to narrow much more than what is currently priced into the market and offset the positive safe haven flow to the US dollar which is created in a risk-off environment.”

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TAGS: Pound Dollar Forecasts