Pound to Dollar Outlook: Delays in Fed Rate cuts Biggest Risk to FX Markets

March 29, 2024 - Written by David Woodsmith

STORY LINK Pound to Dollar Outlook: Delays in Fed Rate cuts Biggest Risk to FX Markets

The Pound to Dollar (GBP/USD) exchange rate was unable to challenge 1.2650 on Wednesday and retreated to test the 1.2600 level on Thursday.

Inflation concerns have been a key focus on both sides of the Atlantic with hawkish Fed rhetoric supporting the dollar.

GBP/USD will need to hold 1.2600 to maintain hopes that it can build on April’s positive seasonal trend.

The latest ONS data confirmed that UK GDP declined 0.3% for the fourth quarter of 2023 after a 0.1% decline the previous quarter.

This confirmed a technical recession for the second half of 2023 while GDP for 2023 as a whole posted a slight 0.1% gain for the year.

The latest Lloyds Bank business barometer was unchanged at 42 for March and above the long-term average of 28.

Hann-Ju Ho, Senior Economist, Lloyds Bank Commercial Banking commented; “this month’s figures maintain the recent improvement bringing a positive end to the first quarter of the year. Firms are showing increasing resilience which is reflected in their easing concern about supply chain disruption and energy prices.”

She added; “Overall, the Barometer across the quarter suggests that we could begin to see more optimistic economic growth in 2024 than seen in recent years, although medium-term challenges remain.”

There was a slight easing of wage pressure for the month, but there was only a further marginal easing of price increases and inflation pressures remained above the long-term average.

The outlook for interest rates will be a key element for the Pound, especially after a limited dovish Bank of England shift after the latest policy meeting.

Haskel and Mann who voted for a rate hike in February dropped the call in March and voted to hold rates at 5.25% while Governor Bailey also suggested that interest rate cuts were realistic this year.

In comments on Thursday, Haskel stated that his decision to change his vote was due to improvements in critical indicators of inflation.

Haskel, however, was still notably cautious surrounding the outlook. Although the decline in headline inflation is welcome, he stated that it is not a good guide to underlying inflation and it is underlying inflation that is crucial for monetary policy.

In this context, he stated that a cut in interest rates is likely to be a long way off.

As far as Federal Reserve policy is concerned, Fed Governor Waller adopted a broadly hawkish stance in comments on Wednesday.

According to Waller, the Fed needs to see at least a couple of months of data to be sure that inflation is heading to 2% and that more progress is needed before supporting a rate cut.

In this context, he added that there was no rush to cut rates and the latest data suggests that fewer rate cuts are possible this year, especially as the latest data had been generally disappointing.

He did, however, add that wage pressures have been easing.

Following the comments, markets are now pricing in just under a 65% chance that the Fed will cut interest rates at the June policy meeting from 70% previously.

According to ING; “The speech will have been a disappointment to dollar bears who might have been hoping for some reassuring confidence on the disinflation process and some further discussion of the seasonal problems with the firm January inflation data.”

MUFG pointed to the risk of delays in Fed rate cuts and added; “It is one potential catalyst that could disrupt the current period of low volatility for major foreign exchange rates and encourage an even stronger US dollar.”

This development would be a dual blow for the Pound, especially as high volatility would tend to undermine the UK currency.

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TAGS: Pound Dollar Forecasts