Pound US Dollar Exchange Rate Sold Above 1.2700

January 21, 2024 - Written by Ben Hughes

STORY LINK Pound US Dollar Exchange Rate Sold Above 1.2700

The Pound to Dollar (GBP/USD) exchange rate dipped after the latest UK retail sales data, although it was broadly resilient, especially with uncertainty over Bank of England policy. It also secured some support from net gains in equities and consolidated close to 1.2680 at Friday’s New York open.

GBP/USD was, however, again unable to hold 1.2700 as the dollar held firm in global markets.

Scotiabank; “Call it a consolidation because the underlying trend remains USD positive in general and a bit more USD strength overall seems more likely than not in the coming weeks.”

According to the Office for National Statistics (ONS), UK retail sales volumes slumped 3.2% for December compared with expectations of a 0.5% increase and followed a revised 1.4% increase for November.

This was the sharpest monthly decline since January 2021.

There was an element of Christmas sales being pulled earlier to November which hurt December, although there was also evidence of underlying weakness.

In the three months to December sales declined 0.9% from the previous three months.

Non-food store sales declined 3.9% on the month with a 3.1% slide for food-store sales.

Sales volumes declined 2.8% in 2023 to the lowest level since 2018.

The sharp increase in prices remained a key element as sales volumes declined 4.8% since February 2020 while the value of sales has increased 13.9%.

Scotiabank commented; “Weak retail Sales on the quarter overall increase the risk of a mild technical recession in the UK and naturally drove markets to price back in some of the anticipated BoE easing that swaps pricing removed after the CPI data.

The data flow overall triggered significant uncertainty over Bank of England policy.

City Index strategist Fiona Cincotta commented; "Retail sales are desperately weak, but services do seem to be showing some signs that growth is still happening and yes, it does put the Bank of England in a difficult situation.”

She added; "Broadly speaking, inflation is at the level that it is and they're not going to take the risk of taking their foot off the gas too early."

ING expects the BoE will be focussed on services inflation; “This means that a further repricing lower in BoE rate expectations would require markets to make a conviction call that the December CPI surprise was just a blip.”

Socgen expects a firm dollar tone to remain for now; “This week saw more weakness in manufacturing, in hard data and surveys, but solid retail sales and an ever-tightening labour market have pushed longer-dated yields up. The data and the rate move have supported the USD but looked at in this way, the impression is that there is potentially more to go. The Dollar’s bounce isn’t necessarily over yet.

The bank added; “there is room for GBP/USD to drift to 1.2500 before we get the mid-February UK data blast.”

According to ING, rate-cut pricing is still too high; “Markets remain attached to the prospect of a March cut, now priced with around 50-60% probability, but we really struggle to imagine the Fed cutting in two months’ time against the current economic backdrop.”

ING added on the dollar; “The only key data release in the US before then is the fourth quarter GDP figures next week, and barring major surprises there, there is no compelling bearish story for the next week or so.”

According to Westpac's head of foreign exchange strategy Richard Franulovich."The thumping message from U.S. activity data and central bankers is that markets are too aggressively priced for rate cuts in 2024."

He added; "That, and a fresh bout of turbulence across China's property and financial markets has the dollar returning to form."

Scotiabank added; “Sterling is underperforming but losses are relatively mild and the broader, sideways range for spot in place over the past month or so remains intact.”

The bank is broadly neutral on the GBP/USD pair in the short term.

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TAGS: Pound Dollar Forecasts