Pound to Dollar Outlook: "Another test of 1.28+ levels would not surprise" say Scotiabank

January 25, 2024 - Written by David Woodsmith

STORY LINK Pound to Dollar Outlook: "Another test of 1.28+ levels would not surprise" say Scotiabank

Dollar and Pound Benefit from Upbeat Data, GBP/USD Exchange Rate Holds Below 10-Day highs

The Pound to Dollar (GBP/USD) exchange rate jumped to highs at 1.2775 after stronger than expected UK PMI data, but the Pound was unable to hold gains and retreated to 1.2740 after US data also beat market expectations.

The UK PMI manufacturing index increased to a 9-month high of 47.3 from 46.2 in December and above consensus forecasts of 46.7.

The services-sector index improved to an 8-month high of 53.8 from 53.4 and above market expectations of 53.2.

Overall business confidence increased to the highest level since May 2023.

As far as inflation pressures are concerned, prices charged by private sector firms increased at the weakest pace since last October.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence commented “UK business activity growth accelerated for a third straight month in January, marking a promising start to the year.”

He added; “Business activity and confidence are being in part driven by hopes of faster economic growth in 2024, in turn linked to the prospect of falling inflation and commensurately lower interest rates.”

Williamson did, however, warn over the risk of disappointment on interest rates. He noted; “However, the surprising strength of growth in January, which has exceeded forecasts, may deter the Bank of England from cutting interest rates as soon as many are expecting.”

ING’s Francesco Pesole noted a solid Pound performance and added; "That’s because the UK PMIs in the current environment look quite encouraging. I think when you compound what we saw in inflation lately, and you have better PMIs, they’re probably offsetting the poor retail sales that we had in the UK for December.”

He added; “So ultimately with Fed pricing that continues to move towards the dovish side on easing, the market is not really comfortable pricing in more easing from the Bank of England.”

According to Scotiabank; “Markets are reducing bets on BoE easing which is supporting the GBP; swaps moved to price in a bit less than 100bps of cuts this year following the PMI data. Late last year, markets had implied 150bps or so of cuts.”

The US PMI manufacturing index returned to expansion for January with a 15-month high reading of 50.3 from 47.9 the previous month and compared with consensus forecasts of an unchanged reading for the month.

The services-sector index improved to a 7-month high of 52.9 from 51.4 and above expectations of 51.0.

There was a significant shift and divergence in pricing trends.

Manufacturing output prices increased at the strongest rate since April 2023 while service-sector prices increased at the slowest rate since June 2020.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence commented; “An encouraging start to the year is indicated for the US economy by the flash PMI data, with companies reporting a marked acceleration of growth alongside a sharp cooling of inflation pressures.”

He added; “With the survey indicating that supply delays have intensified while labor markets remain tight, cost pressures will need to be monitored closely in the coming months, but for now the survey send a clear and welcome message of resilient economic growth and sharply waning inflation.”

According to ING; “We don’t have a strong bearish view on the dollar in the short-term, but yesterday’s moves did appear overdone in an environment where Fed funds futures still price in 130/140bp of cuts this year. We’ll be more convinced of the sustainability of a near-term dollar rebound once short-term Treasury yields take another leap higher.”

Alvin Tan, head of Asia FX strategy at RBC Capital Markets considered that the market was trapped in a relatively narrow range.

He added; "The dollar index currently is literally almost unchanged since last Wednesday. In many ways it's following U.S. rates (bond yields) which have also been chopping around. FX and rates markets are waiting for the next catalyst."

According to Scotiabank, the bearish Pound trend is weakening

It added; “Another test of 1.28+ levels would not surprise.”

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TAGS: Pound Dollar Forecasts