Transatlantic Interest Rate Debate Dominates Pound Sterling

September 9, 2024 - Written by David Woodsmith

STORY LINK Transatlantic Interest Rate Debate Dominates Pound Sterling

The dollar has recovered ground with the Pound to Dollar (GBP/USD) exchange rate below 1.3100 and close to 2-week lows.

Following the key US jobs data and Federal Reserve comments, sentiment has shifted towards a smaller 25 basis-point US interest rate cut at next week’s policy meeting.

This shift has supported the dollar with the currency index recovering to 101.50 from last week’s low near 100.50.

According to ING the dollar will be resilient; “We have noted before that seasonal patterns tend to be positive for the dollar in September. And it seems it will now take an awful lot to see DXY break below 18-month lows near 100.”

Markets will have multiple data points to focus on over the next few days with further sharp Pound moves.

US interest rate chatter will continue while Tuesday’s Presidential debate between Trump and Harris will also be a big talking point.

The latest COT data, released by the CFTC, recorded a further increase in long, non-commercial Pound positions to a 5-week high just over 108,000 contracts in the latest week from close to 90,000 the previous week.

The extent of long positions will leave the Pound vulnerable to a correction, especially if risk conditions come under pressure.

Tuesday’s UK labour-market data will also have an important impact on Bank of England expectations and the Pound.

Consensus forecasts are for the UK unemployment rate to edge lower to 4.1% from 4.2% with a further slowdown in headline average earnings growth to 4.1% from 4.5% previously.

The latest KPMG report stated that there was a significant labour-market slowdown in August. Significantly, wages growth for permanent employees dipped to a 5-month low and one of the weakest outcomes since early 2021.

A slowdown in wages growth will make further Bank of England rate cuts more likely.

There is very little doubt that the US labour market has softened, but the extent of this weakness remains unclear.

Fed Governor Waller appeared to back a 25 basis-point rate cut at next week’s policy meeting, but also pointed to the potential for a series of cuts over the next few months.

The Fed is now in a blackout period ahead of that meeting, but will not want to surprise markets.

In this context, traders will be watching for unofficial briefings through the Wall Street Journal.

According to David Doyle, head of economics at Macquarie; "While more substantial cuts through year-end are possible should data deteriorate, our baseline remains for a 25 bps rate cut in September, with easing at this pace also likely to occur in November and December."

MUFG expects the dollar will lose more ground given a weaker labour market; “It should encourage the Fed to cut rates more quickly to dampen the risk of an even sharper slowdown for the US labour market with the starting point for the policy rate already elevated.”

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TAGS: Pound Sterling Forecasts