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Pound to Dollar Rate Jumps to 2-Month Best Above 1.2400

November 15, 2023 - Written by Frank Davies


The Pound Sterling (GBP) moved to test the best exchange rate levels of two months against the US Dollar (USD) on Tuesday.

Benign US inflation data was a key element in global markets on Tuesday with markets pricing out any further Fed rate hikes.

In response, the dollar dipped sharply while risk appetite also improved sharply which helped underpin the Pound.

The Pound to Dollar (GBP/USD) exchange rate jumped to test the 1.2400 level following the data and secured a further advance to 2-month highs close to 1.2430.

A break above 1.2450 could potentially trigger an attack on 1.2500.

US consumer prices were unchanged for October compared with consensus forecasts of a 0.1% increase. The year-on-year increase declined to 3.2% from 3.7% and below expectations of 3.3%.

Energy prices declined 2.5% on the month with a 4.5% annual decline while food prices increased 3.3% over the year.

Core prices increased 0.2% for the month compared with forecasts of 0.3% with the annual increase edging lower to 4.0% from 4.1% and below expectations of 4.1%.

This was the lowest core reading since September 2021.

Prices for used vehicles declined for the fifth successive month and the monthly increase in shelter prices slowed to 0.3% from 0.6% previously.

The data offered significant reassurance over inflation trends within the US economy.

Treasuries rallied strongly with the US 10-year yield sliding to 4.50% from close to 4.60% ahead of the release.

Equities also posted significant gains after the data with an increase of more than 1.0% in S&P 500 index futures.

There was a significant shift in pricing for US interest rates with Fed Funds rate futures indicating that there is no chance of a rate hike in December.

Markets also indicated that the chance of a January rate hike had dipped to below 5%.

According to BMO Capital Markets strategist Ben Jeffrey; “I think it diminishes the probability the Fed hikes in December and makes the bar for them to tighten again pretty high.”

The most likely outcome is also seen that rates will be lower by June.

According to Stuart Cole, Chief Macro Economist at Equiti Capital; “we may yet hear further warnings that it is still too early to be bringing the tightening cycle to an end. The problem for the Fed now is that much of the market will probably no longer believe it.”

As far as bond yields are concerned, Thomas Simons, senior economist at Jefferies commented; “I expect the data will take a turn for the worse by January, and more rate cuts will start to be priced into the market, driving yields lower overall."

The latest Reuters poll forecast that the 10-year yield would decline to 4.3% in June 2024 and 4.00% by the end of 2024.

Lower yields and stronger risk appetite were crucial in undermining dollar demand.

ING We still think that the decisive blow to 'de-throne' the dollar will have to be given by a turn lower in activity data, which can make markets feel comfortable with pricing in more rate cuts. So, we will be looking with some interest at retail sales figures tomorrow.

Earlier, the UK labour-market data reported a 7.7% annual increase in wages, in line with consensus forecasts from 7.9% previously.

Headline earnings increased 7.9% in the year from a revised 8.2% previously and above expectations of 7.5%.

The data suggested that the labour market is cooling, but the rate of increase in wages suggested that the Bank of England would still have to be cautious and maintain a restrictive monetary policy.

According to Scotiabank; “Still relatively tight jobs and elevated wage growth will bolster expectations of a “high for longer” BoE policy stance.”

Scotiabank considers that the move through 1.2310 will lead to a challenge on the 1.2450 level.

The latest UK inflation data will be released on Wednesday.

According to City Index market strategist Fiona Cincotta; “Cooler inflation could offset concerns about the hotter-than-forecast wage growth, which is at least trending in the right direction even if slower than expected.”
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