October 16, 2023 - Written by David Woodsmith
STORY LINK Pound to Dollar Rate News: Recovery to 1.221 but Sterling Traders on Edge
The Pound to Dollar (GBP/USD) exchange rate came under further pressure on Friday under the influence of a stronger dollar and weaker risk appetite.
With position adjustment ahead of the weekend, GBP/USD dipped to lows at 1.2125 before stabilising.
The Pound to Euro (GBP/EUR) exchange rate retreated to lows at 1.1540 and after a brief spike to 1.1570, the pair settled around 1.1550 on Monday.
The dollar has been boosted by fragile risk conditions due to the situation surrounding Israel and Gaza with Israel expected to launch an offensive on Gaza imminently.
The US economic data and Federal Reserve stance will also be important.
Retail sales data will be released on Tuesday and Fed speakers will be watched closely with Chair Powell due to make comments on Thursday.
At this stage, markets are confident that rates will not be increased in November, but the inflation data fuelled expectations that rates will stay higher for longer.
On Friday, the University of Michigan consumer confidence index retreated to a 4-month low of 63.0 from 68.1 previously.
The 1-year inflation expectations index, however, jumped to 3.8% from 3.2%, illustrating that the Fed continues to face tough trade-offs.
According to Bank of America (BoA); “With the blackout period starting two days later, this will be the Fed’s last chance to jawbone the markets if it wants to raise rates in November.”
BoA added; “Beyond guidance on the November move, we expect Powell to be highly non-committal on the path of policy rates. We expect him to reiterate that the Fed is data dependent and remains committed to bringing inflation back to the 2 percent target. In our view, sticky services inflation means sticky policy rates, so the theme of higher for longer remains alive and well.”
MUFG put the emphasis on slightly less hawkish Fed rhetoric and added; “If a similar message is delivered by Fed Chair Powell and New York Fed President Williams this week that higher market rates if sustained have tightened US financial conditions significantly, it will make market participants more comfortable that the Fed is on hold now which is helping to prevent an even stronger US dollar.”
According to Goldman Sachs; “All in all, we stick to our baseline of shallow Dollar depreciation but continue to see the balance of risks tilting towards further Dollar appreciation if evidence of a more balanced global picture does not surface soon.”
Rabobank added; “Safe-haven demand is likely an additional supportive factor.
Sterling will be influenced strongly by risk conditions during the week, although the UK data releases will also be important.
In comments on Friday, Bank of England Governor Bailey stated that UK interest rate decisions will remain tight and UK data will, therefore, inevitably remain important.
NatWest commented that all inflation releases are important across major currencies. It added; “UK CPI will be similarly important for the November BoE meeting, although we expect it to remain soft enough that no further tightening will be required. GBP has continued to track nominal yields over the past year, so the release is clearly important.”
ING pointed out that this is an important week for Sterling given the wages and CPI data.
It did, however, add; “Sterling is rather a sideshow at the moment given that investors are largely preoccupied with events in the Middle East and whether the Fed is embarking on a somewhat less hawkish narrative.”
ING added; “The difficult international environment should mean that GBP/USD remains biased back to the recent lows near 1.2050.”
According to Unicredit; “Signs that the UK economy remains broadly weak and that price pressure is receding might thwart a GBP-USD recovery back towards 1.23.”
The EY Item Club expects the UK to avoid an official recession; “A likely end to rate increases at the Monetary Policy Committee’s (MPC) last meeting, combined with falling inflation and a return to real pay growth, should keep the economy from falling into recession.”
Market positioning will be an important element during the week on both the Sterling and dollar side.
According to Bank of America; “The USD long is objectively crowded when looking at the extent to which investors extended their longs in September, but early signs of selling are showing up.”
The latest weekly COT data released by the CFTC also recorded a further net increase in short, non-commercial Sterling contracts to 10,000 contracts from 6,700 previously.
This was the second successive short position and the largest short since the end of March. This positioning will lessen the scope for further Sterling selling.
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TAGS: Pound Dollar Forecasts Pound Sterling Forecasts