Pound Sterling Treads Water vs US Dollar Ahead of Bank of England

February 1, 2024 - Written by David Woodsmith

STORY LINK Pound Sterling Treads Water vs US Dollar Ahead of Bank of England

Foreign exchange update: The Pound to Dollar exchange rate found support just below 1.2670 and posted net gains to above 1.2700 after the New York open.

Markets were monitoring event risk closely with two central bank positions over the next 24 hours.

According to Kirstine Kundby-Nielsen, FX analyst at Danske Bank; "Markets are just positioning themselves before the Fed tonight and Bank of England policy meeting tomorrow."

On the Pound, Bank of America strategist Kamal Sharma commented; "We're operating in a bit of a void of information from the Bank of England, which is unusual coming into the first meeting of the year."

Weaker US jobs data was the key factor pushing the dollar weaker and benefitting GBP/USD.

The latest US ADP data recorded an increase in non-farm payrolls of 107,000 for January, below consensus forecasts of 145,000 and the December increase was also revised down to 158,000 from the flash reading of 164,000.

Year-over-year pay gains for job-stayers reached 5.2 percent in January, down from 5.4 percent in December. For job-changers, pay was up 7.2 percent, the smallest annual gain since May 2021.

ADP chief economist Nela Richardson commented; "Progress on inflation has brightened the economic picture despite a slowdown in hiring and pay. Wages adjusted for inflation have improved over the past six months, and the economy looks like it's headed toward a soft landing in the U.S. and globally."

Markets remain wary over the validity of the data, but the weaker-than-expected increase will increase speculation that there will be a disappointing figure for Friday’s employment report.

According to ING; “Given US data releases – most recently the December JOLTS data showing job openings expanding – there seems little reason for tonight’s FOMC communication to push the market to price any more than the current 130bp of rate cuts for this year. This should be a neutral/positive development for the dollar.”

MUFG noted that US data has been relatively firm and noted; “So it’s hard not to conclude that the case for turning more dovish than at the last meeting in December is pretty weak.”

MUFG added; “Powell may well try and distance any rate cut discussion from the March meeting. Unless the FOMC have had a glimpse at the NFP to be released on Friday and it’s a horrid report, the logic of giving a signal of a potential March rate cut just isn’t there.”

Danske Bank does expect a relatively near-term rate cut; “While Powell could deliver some hawkish tones at the FOMC’s January meeting, we still think the Fed is on track to cut rates in March.”

According to Commerzbank analyst Michael Pfister; “If Fed Chair Jerome Powell is more decisive than last time in pushing back against the rather ambitious expectations for this year, then the Dollar should benefit again. However, given his surprising reversal in December, when he said that the Fed was not interested in market expectations, I find it hard to imagine that this will happen.”

He added; “But after the December meeting, you have to realize that any surprise is possible. So perhaps the key question is: what does Powell surprise us with today?”

The overall UK data flow has been broadly positive for the Pound.

The Lloyds Bank business barometer strengthened to 44 for January from 35 the previous month and the highest reading for close to two years.

Companies were more optimistic over hiring plans, but there was some evidence of wage moderation the with proportion of firms expecting to increase wages by more than 4% declining to a 5-month low.

As far as pricing trends are concerned, plans to increase prices posted a back-to-back decrease for the first time since June 2022.

According to the latest Nationwide data, house prices increased 0.7% for January on a seasonally-adjusted basis after no change the previous month and compared with market expectations of no change for the month.

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TAGS: Pound Dollar Forecasts