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Pound to Dollar 2024 Outlook: ECB to Slash Rates First, Then FED, BoE

December 7, 2023 - Written by John Cameron


US Dollar Resilient Despite Weak US Jobs Growth, GBP/USD Exchange Rate Held Close to 10-Day Lows

The latest US data continued to point to a slowdown in the labour market and bond yields declined.

The Pound, however, was unable to make headway, especially with weak UK data and Bank of England concerns over UK credit dynamics.

The Pound to Dollar (GBP/USD) exchange rate was held below 1.2600 into the European close and close to 10-day lows.

In its half-yearly Financial Stability Report, the Bank of England (BoE) stated that stronger-than-expected wage and income growth since its last review in July had reduced some of the strain for households.

Nevertheless, it still warned over credit-related stresses in the economy.

It added; “household finances remain stretched by increased living costs and higher interest rates, some of which has yet to be reflected in higher mortgage repayments.”

According to the bank, some five million households face paying an extra £240 a month on their mortgage bill by the end of 2026 as the last cheap fixed-rate loans come to an end.

On wider financial markets it warned; “Although there are few signs of stress in these markets so far, a worsening macroeconomic outlook, for example, could cause sharp revaluations of credit risk.”

According to Bailey; “Riskier corporate borrowing in financial markets such as private credit and leveraged lending is particularly vulnerable in the current environment.”

The UK construction PMI index edged lower to 45.5 for November from 45.6 the previous month and compared with consensus forecasts of 46.7.

This was the third successive reading below the 50.0 level and the second lowest reading since May 2020.

Employment decline for the first time in 10 months and purchasing prices declined at the fastest rate for 14 years.

Tim Moore, Economics Director at S&P Global Market Intelligence, commented; "A slump in house building has cast a long shadow over the UK construction sector and there were signs of weakness spreading to civil engineering and commercial work during November.”

As far as the US economy is concerned, the ADP reported that private-sector payrolls increased 103,000 for November after a revised 106,000 increase the previous month and again below consensus forecasts of 130,000.

There was also a further slowdown in annual wages growth to 5.6%, the lowest reading since September 2021.

According to ADP; “Last month brought moderate growth in hiring and another slowdown in pay gains. Both goods and services saw weakness, with leisure and hospitality and manufacturing posting declines.”

It added; “Restaurants and hotels were the biggest job creators during the post-pandemic recovery. But that boost is behind us, and the return to trend in leisure and hospitality suggests the economy as a whole will see more moderate hiring and wage growth in 2024.”

The data boosted confidence in a soft landing for the economy with the 10-year bond yield declining to 3-month lows below 4.15%.

Equities initially made headway, but faded towards the European close and the dollar resisted selling.

According to ING; “We suspect markets are holding a more cautious stance as we head into the key US payroll figures on Friday and the Fed meeting next week, where there is a good probability the FOMC will deliver a protest against rate cut bets.”

Markets overall were continuing to debate the relative outlook for interest rates.

Jane Foley, head of FX strategy at Rabobank commented; "Bank of England policy makers have been pretty consistent in saying the labour market is too tight and it's too early to consider talking about interest rate cuts, and inflation is a bit higher in the UK than in the euro zone or the U.S."

She added; “As a result "the market is thinking that the ECB could be cutting rates first, then the Fed and then the BoE."

This narrative should provide some Pound support.
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