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Pound to Dollar Tech Outlook: "Evening Star on Intraday Chart" say Scotiabank

November 16, 2023 - Written by Tim Boyer


GBP/USD Exchange Rate Consolidates Below 2-month Highs, Markets More Confident over 2024 BoE Rate Cuts

After the surge to 2-month highs at 1.2500 on Tuesday, the overall Pound to Dollar (GBP/USD) exchange rate theme has been one of consolidation.

The UK inflation data triggered fresh expectations of interest rate cuts in 2024 which also curbed the potential for further GBP/UD buying.

With stronger than expected US retail sales data, GBP/USD retreated sharply to near 1.2400 after the Wall Street open before a rebound to 1.2450.

After a surge on Tuesday, equities made further headway which provided net support for the Pound.

According to MUFG; “GBP performance remains linked to global risk appetite to some degree and hence the sharp drop in global yields and the positive impact on equities yesterday helped support GBP.”

The headline UK inflation rate slumped to 4.6% from 6.7% and slightly below consensus forecasts of 4.7% while the core rate retreated to 5.7% from 6.1% and below expectations of 5.8%.

MUFG noted; “this sharp drop in CPI will reinforce the expectations of the end of monetary tightening in the UK.”

The bank added; “Beyond the US dollar we remain cautious on the scope for GBP to outperform given the monetary policy impact looks to be weighing down more on the real economy and mild recession looks likely in the coming quarters.”

Raymond James strategist Jeremy Batstone-Carr, added; "This sends a clear sign that the Bank's aggressive interest rate hikes are paying off, albeit slowly and at the expense of subdued economic activity."

According to Morgan Stanley UK economist Bruna Skarica; “The economy is weak, and firms’ pricing is waning.”

He added; “On top of all this came sizeable base effects from energy. The UK no longer looks like such a major outlier when it comes to inflation. We see the print as supportive of our call of BoE cuts next year, from May.”

Julien Lafargue, chief market strategist at Barclays Private Bank "The UK economy is still very much facing stagflation and, in our view, the road ahead will likely continue to be bumpy."

The bank expects no BoE rate changes for a few months.

Hugh Gimber, global market strategist at J.P. Morgan Asset Management expects the BoE will have to remain cautious; "The case against any further rate hikes is increasingly clear, but significantly more evidence will be required before rate cuts can start to be considered."

Expectations of lower interest rates will hurt the Pound, but as inflation declines, there would also be some impact in boosting confidence in UK fundamentals.

According to Credit Agricole; “we also note that further evidence that (cost-push) inflation has declined precipitously could be seen as supportive for UK real incomes and thus domestic demand from here. This much could limit any GBP losses on the back of softer-than-expected inflation data.”

GBP/USD is still likely to need a weaker dollar to make significant headway.

Rabobank expects a firm dollar tone; “In view of downside risks to global growth we expect the USD to remain well supported in the coming months as subdued levels of risk appetite underpin safe-haven assets. This suggests potential for further downside risks to cable.”

US retail sales declined 0.1% for October after a revised 0.9% increase the previous month.

ING expects firm US demand to continue for now; “This indicates decent resilience and supports our view that fourth quarter GDP growth may not be as weak as the consensus is currently predicting – consensus is currently predicting 0.7% annualised 4Q GDP growth while we are forecasting 1.5% GDP growth.”

According to Scotiabank; “Cable is forming a short-term top/reversal signal (‘evening star’) on the intraday chart. Cable’s peak is developing right on the 200-DMA (1.2514) so price action merits some close attention.”

The bank still considers that the broader Pound trend looks constructive.

It adds; “Minor GBP losses should find support in the low 1.24 zone for now.”
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