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Pound Sterling Fails to Hold Euro, Dollar Gains After Autumn Statement

November 22, 2023 - Written by Ben Hughes


GBP/USD Exchange Rate Slides on Dollar Revival and UK Growth Forecast Disappointment

The pound-to-dollar (GBP/USD) exchange rate peaked at 1.2550 ahead of the Autumn Statement, but failed to hold the gains.

Weak UK growth forecasts undermined the Pound while stronger than expected US data helped trigger a further dollar recovery with GBP/USD sliding to near 1.2450.

ING commented; "If you're looking at cable, it's trading below $1.25. But that is lot to do with the dollar move. Initial jobless claims came in much lower, triggering some dollar buying.”

In the Autumn Statement, Chancellor Hunt confirmed that there would be a cut in National Insurance rates with the headline rate for employees reduced to 10% from 12%.

According to the OBR there was a net fiscal windfall of £27bn due in part to unchanged projections for departmental spending and nearly all of this fiscal headroom was used in the package.

Overall growth forecasts were downgraded from the March update.

The OBR now expects that there will be 0.6% growth this year compared with the previous forecasts of a 0.2% contraction. It expects 0.7% growth in 2024 and 1.4% in 2025 compared with the March forecasts of 1.8% and 2.5% respectively.

The OBR is, however, more optimistic than the Bank of England which expects no growth in 2024.

The UK CBI industrial orders expectations index deteriorated further to –35 for November from –26 previously and compared with consensus forecasts of –25.

CBI Deputy Chief Economist Anna Leach commented; “This latest data will fuel concerns that the economy is slowing swiftly as the highest interest rates for 15 years take their toll on demand.

She added; “The further softening in orders this month is a worry, with order books now in their weakest position since the start of 2021 when the economy was locked down amid the pandemic”.

The UK PMI business confidence data will be watched closely on Thursday for further evidence on the economy.

HSBC remains cautious over the economy and Pound; “The bigger picture for GBP remains challenging, with inflation still too high (despite being lower), and a stalling economy which has yet to face the full force of earlier interest rate hikes.”

US initial jobless claims declined to 209,000 in the latest week from 233,000 the previous week and below consensus forecasts of 226,000.

Continuing claims also declined to 1.84mn from 1.86mn the previous week.

Nancy Vanden Houten, lead U.S. economist at Oxford Economics in New York commented; "Looking past seasonal noise, we think the claims data are consistent with a job market that is cooling enough to keep rate hikes off the table, but too strong to make rate cuts a consideration any time soon."

She added; "That said, leading indicators suggest claims will level off again soon. Layoff announcements and WARN notices—the best near-term leading indicators of jobless claims—have risen from their summer lows, but aren’t clearly trending higher."

Elsewhere, the University of Michigan consumer confidence index was revised to 61.3 from 60.4 previously. Inflation expectations were also revised slightly higher.

Durable goods orders declined 5.4% for October, although underlying orders were unchanged.

Rabobank expects no further Fed rate hikes, but added; “We expect the Fed to remain on hold until the middle of next year. By then we expect the FOMC to be ready to cut rates as rising unemployment, most likely accompanied by a recession, will give the Committee confidence that inflation is on the right path.”

There was a slight shift in interest rate expectations with Fed Funds futures still seeing very little chance that interest rates will be increased again, but the chances of a rate cut by March declined to 25% from 30% the previous day.

There was further position adjustment ahead of Thursday’s Thanksgiving Holiday which encouraged a limited covering of short dollar positions.

According to Colin Asher, senior economist at Mizuho Corporate Bank; “the dollar softened in the early part of the week, but it's run out of steam in the last 24 hours."
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