Pound to Dollar Outlook: Possible Recovery to 1.275-1.28 say These Analysts

January 17, 2024 - Written by John Cameron

STORY LINK Pound to Dollar Outlook: Possible Recovery to 1.275-1.28 say These Analysts

Wage Growth Moderation and Weaker Equities Undermine the Pound, GBP/USD Exchange Rate Sinks to 10-Day Lows

Pound Sterling (GBP) exchange rates lost ground in global currency markets due to a stronger dollar, weaker equities and a further slowdown in wages growth.

Overall risk appetite remains more fragile amid on-going concerns surrounding Middle East tensions.

US equity futures are trading around 0.5% lower and the FTSE 100 index is 0.4% lower.

In this environment, the dollar has gained defensive support in global markets.

The Pound to Dollar (GBP/USD) exchange rate has retreated to 10-day lows below the 1.2650 level after the European open.

GBP/EUR traded around 1.1610.

Markets will be watching the forthcoming data very closely on Wednesday.

According to the ONS data, the UK unemployment rate held at 4.2% in the three months to November and compared with consensus forecasts of a small increase to 4.3% from 4.2%.

The ONS also reported that there was a further decline of 24,000 in UK payrolls for December.

Vacancies declined 49,000 in the quarter to 934,000, the 18th successive quarterly decline and longest run on record.

The main market focus was again on wages given the importance for Bank of England (BoE) policy expectations.

Headline wages increased 6.5% in the year to November from 7.2% previously and compared with market expectations of 6.8% and the lowest reading since May 2023.

Underlying wages increased 6.6% in the year from 7.2% previously which was in line with market expectations.

According to ING; “the bottom line is that both wage growth and services inflation, the datasets that are guiding monetary policy right now, are below Bank of England projections. But further progress is likely to be steady, at least for the next quarter or so.”

The impact on Bank of England policy will inevitably be a key focus.

Following the data, traders now expect around 125 basis points of interest rate cuts from the Bank of England this year and over a 90% chance of a May cut.

PwC UK economist Jake Finney, commented; “Signs that the labour market is gradually normalising will reinforce the view that rate cuts could come as early as May.”

Ashley Webb, UK economist at Capital Economics expects that a hawkish stance will be maintained at the early-February meeting, but expects a rate cut to take place at the end of the second quarter.

He noted; “Overall, the second bigger-than-expected fall in wage growth in as many months lends some support to our view that interest rates will be cut from 5.25% to 5% in June.”

ING expects near-term BoE caution; “Nothing in these latest figures is likely to alter the market’s view that the BoE is headed for a May rate cut. But we’d caution that the Bank will want to see more progress on both the official pay numbers as well as those survey expectations of wages before kick-starting an easing cycle.”

The bank also expects that tax cuts in the March budget will deter an early move.

According to ING; “Our base case for now is that the Bank starts rate cuts in August.”

MUFG expects the Pound will struggle; “The developments should provide further reassurance to the BoE that the risk of more persistent inflation in the UK are easing. It will encourage the UK rate market to price in earlier and deeper BoE rate cuts in the year ahead weighing on the pound.”

ING notes that Fed Governor Waller is due to make comments on Tuesday and added; “We presume today that he will stick to that same core message of successful disinflation and will not want to get involved in the fine-tuning of discussing a 2024 easing cycle, but not starting in March. We thus see event risk as a benign one – slightly negative for the dollar and positive for risk.”

ING sees cope for GBP/USD to recover to the 1.2750-1.2800 area.

According to Scotiabank, key GBP/USD support is at 1.2600/10.

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TAGS: Pound Sterling Forecasts