Pound to Dollar Rate: Rebounds from 2-Week Lows

October 20, 2023 - Written by Frank Davies

STORY LINK Pound to Dollar Rate: Rebounds from 2-Week Lows

The Pound to Dollar (GBP/USD) exchange rate remained under pressure in early Europe on Thursday and dipped sharply to 2-week lows below the 1.2100 level.

Markets drew some limited reassurance from Fed Chair Powell's comments later in the day and GBP/USD recovered to 1.2180.

Overall risk conditions and Middle East fears suggest that GBP/USD is unlikely to recover much further with the risk of renewed net selling into the weekend.

Global developments have tended to dominate with equity markets firmly on the defensive.

The FTSE 100 index posted a slide of 1.2% to trade below the 7,500 level which hurt the Pound.

According to Scotiabank; “Sterling’s tendency to act more like a high beta (or riskier) currency since Brexit is reflected in today’s performance.”

Nicholas Rees, FX market analyst at Monex Europe added "Sterling has been trading with its typical high beta to global risk conditions in recent days."

As far as this week’s economic data is concerned he noted; "The modest undershoot on the wages data contrasted with a slight beat on inflation."

He still thinks that the Bank of England will stay on hold in the short term; "All-in-all though, both show signs of slowing inflationary pressures and with BoE speakers having recently set a high bar for restarting rate hike in our view, we don’t think this round of data moves the needle for either the MPC of the pound."

Money markets are pricing in around an 82% chance that the Bank of England will leave interest rates on hold at the November meeting compared with 77% on Wednesday.

The US bond market remained under pressure with the 10-year yield around 4.95% and close to 16-year highs before a retreat to 4.91%

According to Deutsche Bank; “The 10-year Treasury yield may rise above 5% in the near term, but we will see it end the year lower at 4.4% and decline to 4.10% by the end of Q2 2024.”

In comments on Thursday, Fed Chair Powell stated that more evidence of above-trend growth or that the labour market is no longer easing could warrant further tightening.

He also stated that tighter financial conditions with higher yields could have policy implications and the Fed remains attentive.

The Fed blackout period will start at the weekend and Powell’s rhetoric clearly signals that rates will not be increased at the November meeting.

There was also a slight shift in medium-term pricing with a further rate hike seen as less likely.

US jobless claims declined to 198,000 in the latest week from 211,000 previously. This was below expectations of 210,000 and the lowest reading for 7 months.

The data suggested that the labour market remained strong.

The Philadelphia Fed manufacturing index improved to –9.0 for October from –13.5 previously, but weaker than consensus forecasts of –6.5.

The sub-components were mixed with a slight easing of inflation pressures.

There was little change in the outlook, although markets expect strong inflation pressures will persist.

MUFG noted; “The strong growth momentum is keeping alive expectations that the Fed could deliver one further rate hike later this year or early next year.”

The bank expects the Fed to be patient; “By taking their time the Fed will be able to better understand how sustainable the growth pick-up is likely to be and what is driving the sharp adjustment higher in US yields.”

According to Scotiabank; “With little change in overall economic conditions ahead of their next policy decision, the justification for returning to rate hikes after September’s skip does not appear to be especially strong— the more so as long-term rates are touching their highest level since 2007.”

Elevated US yields will sap underlying Pound support.

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TAGS: Pound Dollar Forecasts