European Currencies Out of Favour, GBP to USD Rate Close to 6-Month Lows

November 22, 2024 - Written by Frank Davies

STORY LINK European Currencies Out of Favour, GBP to USD Rate Close to 6-Month Lows

The Pound to Dollar (GBP/USD) exchange rate has been unable to make headway and drifted to 1.2625 on Thursday, close to 6-month lows just below 1.2600.

Overall risk conditions are less benign amid concerns over an escalation in the Ukraine conflict which is curbing support for European currencies.

ING commented; “That the Biden administration is providing more support before year-end warns of a more aggressive Russian response – a development which is weighing on European currencies and starting to show up in higher natural gas prices.”

Markets also expect policies under a Trump administration will hit European economies while US yields are liable to be higher.

Even if the UK fares better than the Euro-Zone, the Pound will remain at risk.

Danske Bank expects some fading of dollar strength; “Looking ahead, we continue to expect the recent USD momentum to fade toward year-end, as current Fed pricing seems too hawkish and net long USD positioning appears stretched.”

Looking at fundamentals, UK monetary and fiscal policy will remain a key underlying influence for the Pound.

As far as fiscal policy is concerned, the latest data recorded an increase in the government borrowing requirement to £17.6bn for October from £15.8bn the previous year and the second-highest October deficit on record.

For the first seven months of fiscal 2024/25, the deficit increased to £96.6bn from £95.5bn the previous year.

Capital Economics UK economist Alex Kerr noted the lack of room for manoeuvre; “given that the Chancellor only had £9.9bn of fiscal ‘headroom’ against her fiscal mandate left over after October’s Budget, this suggests that if she does want to increase day-to-day spending further, taxes will probably need to rise too.”

Fiscal policy will also have a potential impact on Bank of England (BoE) policies.

There was dovish commentary from Deputy Governor Ramsden on Wednesday.

According to Ramsden he supports the Monetary Policy Committee’s guidance for slow reductions in borrowing costs but; “he’d consider a less gradual approach if the evidence starts to point more clearly to further disinflationary pressures.”

The Pound will be vulnerable if dovish members gain ground in the committee.

Commenting on the inflation data he added; “A very small miss on one month’s inflation forecast doesn't change my assessment of the outlook.”

Fed policies will also have a key impact on the Pound.

Overnight, there were hawkish comments from Fed Governor Bowman.

According to Bowman Progress in lowering inflation appears to have stalled.”

She added that the Fed may be closer to neutral policy than policymakers currently think while inflation remains a concern and it's concerning we are recalibrating policy without reaching inflation goals.”

With wariness over potential inflationary policies from the incoming US Administration, markets are now pricing in around a 55% chance that rates will be cut at the December meeting from over 70% last week.

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TAGS: Pound Dollar Forecasts