Pound to Dollar Rate Tipped to "Break below 1.2500" Today say ING

December 13, 2023 - Written by James Fuller

STORY LINK Pound to Dollar Rate Tipped to "Break below 1.2500" Today say ING

GBP/USD Exchange Rates Dip after UK GDP Miss, Fed “Dot Plot” Crucial for Near-Term Direction

Weaker-than-expected UK data undermined the Pound on Wednesday with the Pound to Dollar (GBP/USD) exchange rate retreating to 1.2510.

Markets will speculate that there will be a more dovish Bank of England (BoE) policy.

The dollar overall was mixed ahead of the latest Federal Reserve interest rate decision and policy statement later in the day.

The US currency will tend to strengthen if there is a hawkish push back against market expectations of sharp rate cuts next year, potentially pushing GBP/USD to 3-week lows significantly below 1.2500.

UK data on Wednesday was significantly weaker than expected with a 0.3% GDP decline for October after 0.2% growth the previously and compared with consensus forecasts for a marginal decline.

All sectors of the economy contracted for the month and GDP was unchanged in the three months to October.

Roger Barker, director of policy at the Institute of Directors commented; “The emerging picture is one of a sinking economy. The possibility that we will move into recession next year has increased.”

Paul Dales, chief UK economist at Capital Economics noted that weakness was broad based which suggests underlying weakness as well as a negative impact from bad weather.

He added; “Whether or not the economy contracts, the big picture is that it remains very subdued and that’s probably going to be the story for 2024.”

A weak economy would have potential implications for the BoE.

According to Dales; “That may nudge the Bank of England a little close to cutting interest rates, although when leaving rates at 5.25% tomorrow the Bank will probably push back against the idea of near-term rate cuts.”

Elizabeth Martins, at HSBC still expects another 6-3 vote by the BoE's Monetary Policy Committee to keep rates unchanged.

Nevertheless, she added that the GDP and wages data this week could prompt some of the three hawkish members to opt to vote for no change rather than a 25 basis-point rate hike.

She added; "If the BoE's hawks wanted to push back on market expectations of rate cuts starting mid-next year, the data are giving them very little work with.”

As far as Wednesday’s Federal Reserve policy decision is concerned there is no real possibility of a change in rates from 5.50%.

The most important elements will be Fed Chair Powell’s press conference and the updated “dot plots” of interest rate forecasts by individual committee members.

According to ING; “We expect the Dot Plots will show only 50bp of cuts in 2024. Still, markets may feel less comfortable about the first rate cut coming in May, and a softening in risk sentiment could help the dollar today – and into Christmas.”

ING added; “Today, GBP/USD may well break below the 1.2500 gravity level.”

MUFG focusses on the dot plots.

According to the bank; “Lower growth and inflation projections and possibly a higher unemployment rate all point to the possibility of an additional rate cut shown in the dots profile for 2024.”

It added; “It’s a close call, but the individual FOMC members may have erred on the side of caution in setting their projections.”

If the rate projections chime with Powell’s rhetoric, this would help boost perceived credibility.

According to MUFG; “That would certainly help Powell in his expected efforts to push-back on the 100bps of rate cuts priced by the market. That could add some renewed upward momentum to yields and prompt another bout of dollar strength.”

Projections of sharper rate cuts would undermine a hawkish Powell message.

OANDA strategist Craig Erlam added. “We cannot expect the Fed to align its message with what markets are currently pricing.”

He added; "It doesn't mean we'll see aggressive push-back, as we have before, but obviously, it's all in the dot-plot at this point. It's almost irrelevant what (Powell) says if the dot plot is pricing in four rate cuts next year."

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TAGS: Pound Dollar Forecasts