HSBC Forecast: US Dollar Strength to Continue Against Euro, Pound Sterling

January 24, 2024 - Written by John Cameron

STORY LINK HSBC Forecast: US Dollar Strength to Continue Against Euro, Pound Sterling

Pound Unable to Defy Stronger Dollar, GBP/USD Exchange Rate Retreats to 1.2650

The dollar lost ground during Tuesday’s Asian session as the yen posted gains, but the US currency rebounded strongly later in the day and USD/JPY traded around daily highs at 148.60 from lows at 147.00.

Although Pound sentiment was firm after favourable government borrowing data, the Pound was unable to hold its ground against a stronger dollar.

With risk conditions also slightly less confident, the Pound to Dollar (GBP/USD) exchange rate dipped to near 1.2650 from highs just below 1.2750.

Business confidence data will be crucial for the Pound on Wednesday.

According to Scotiabank; “Intraday trading has developed a bearish “evening star” pattern over the past 24 hours. Another test of strong GBP support around 1.26 may be developing.”

Risk appetite was boosted during Tuesday’s Asian session by reports that China was preparing a CNY2trn support package for equities.

European bourses moved higher in early trading and risk sensitive currencies also benefitted.

Momentum faded quickly, however, and the UK FTSE 100 index closed marginally lower.

ING was sceptical that there would be a lasting impact; “Doubts about the impact of Beijing rescue package’s effects beyond the short-term automatically extend to the FX impact. It does seem premature to call for a softening in the dollar on the back of this morning’s headlines.”

The UK December government borrowing requirement declined to £7.8bn from £16.2bn the previous year, well below consensus forecasts of £11.5bn and the lowest December deficit since 2019.

For the first nine months of fiscal 2023/24, the deficit still widened to £119.1bn from £108bn the previous year, but this was almost £5bn less than the OBR forecast for the period.

There was a sharp decline in the debt interest payments to £4.0bn from £18.1bn the previous year.

The stronger than expected data will increase estimates of the potential UK headroom for Chancelor Hunt ahead of the March 6th budget.

Capital Economics economist Ruth Gregory noted; “After nine months of the 2023/24 fiscal year, borrowing is on track to undershoot the OBR’s full-year borrowing forecast of £123.9bn by £5.0bn.”

She added; “What’s more, with market interest rate expectations and long-dated gilt yields having fallen since November, we suspect the OBR will revise down its borrowing forecast significantly from 2025/26. That may provide the Chancellor with “headroom” against his fiscal mandate of about £20bn in the Budget.”

Tax cuts would tend to underpin the growth outlook and lessen the scope for Bank of England interest rate cuts.

Markets are still pricing in around a 50% chance of a May rate cut and pricing could slip further.

According to Deutsche Bank; "A lot will need to go right for an easing cycle to begin as early as May, especially in the midst of a still hawkish Bank of England focussing more on late-cycle variables, such as wage growth and services inflation."

HSBC remains bearish on European currencies. It noted; “As the gap between market pricing and central bank guidance remains wide, we expect this USD strength to continue over the near term, notably against the EUR and GBP.”

HSBC added; “Geopolitical risks will also carry scope to add further momentum to recent market moves. Beyond these global headwinds, the EUR and GBP also face domestic economic challenges, for which a ‘high for longer’ rate outlook seems unlikely to offer sustained support for these currencies.”

As far as the US data releases are concerned, the Richmond Fed manufacturing index deteriorated to -15 for January from -11 previously and compared with consensus forecasts of -7.

Shipments and orders also declined at a faster rate for the month and there was a significant drop in employment, but wage pressures increased.

Price pressures were little changed on the month.

Although the manufacturing data was weak, Treasuries were unable to respond with bond yields moving higher on the day.

The 10-year yield increased to 4.15% and market pricing for a March rate cut retreated to near 40% which underpinned the dollar.

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TAGS: Pound Dollar Forecasts