February 5, 2024 - Written by David Woodsmith
STORY LINK Risk of Further GBP/USD Selling: Scotiabank Pound to Dollar Tech Forecast
US Dollar Strength Dominates Markets, GBP/USD Exchange Rate Slides to 7-Week Lows
The UK data was firm on Monday, but the Pound was unable to draw any benefit and the Pound to Dollar (GBP/USD) exchange rate posted further significant losses to 7-week lows at 1.2550.
Dollar strength is liable to dominate for now unless there is extremely weak US data.
The final UK services-sector PMI reading was revised higher to a fresh 8-month high of 54.3 for January from the flash reading of 53.8 with confidence at a 9-month high.
Average prices charged by service sector firms continued to increase at a strong rate for January in historic terms, but the rate of increase was at a 4-month low.
Tim Moore, Economics Director at S&P Global Market Intelligence, which compiles the survey commented; "A combination of falling inflation and improving order books provided a strong boost to business activity expectations across the service economy. Another uplift in business confidence in January provides a signal that elevated levels of geopolitical uncertainty have yet to exert much of a constraint on service sector growth projections for 2024."
Following Friday’s very strong US data, markets were close to ruling out and potential for a Fed rate cut in March with the chances of a cut seen at below 20%.
MUFG commented; “The stronger payrolls makes it even less likely now that the Fed will cut rates as soon as March after the Fed had already pushed back against a rate cut as soon as March at their last FOMC meeting.”
ING expects the dollar will be resilient even if the data releases are weaker than expected. It noted; “Recall that around the turn of last year, this number plunged. However, that number proved a false flag for a slowdown, and equally, we suspect any soft number today will not be able to turn around Friday's price action in financial markets.
According to Nordea; “The key event will be CPI revisions (Friday), which are particularly important for the Fed as they can confirm or weaken the impression of how much inflation has come down.”
It added; “Last year, there were negative surprises as stated by chairman Powell, which showed that inflation was higher than first thought. If the same happens this year, a March rate cut would be out of the question.”
ING also pointed to this week’s CPI revisions; “These benchmark revisions pose the slight risk that the late 2023 welcome disinflation trend gets revised away – which would be dollar-positive and risk-negative. So, it is certainly an event risk to watch carefully.”
There are other potential risk factors in play.
ING pointed to US financial-sector risks; “The wild card to this Fed story remains the commercial real estate sector, where any regional bank stock coming under severe pressure does see early Fed easing being repriced. That is the risk rather than the base case, however. We look for the first Fed rate cut in May.”
MUFG also pointed to banking-sector risks; “A further escalation of concerns over the health of US regional banks in relations to commercial real estate losses is the main downside risk to the US dollar in the near-term. The latest Fed Senior Loan Officer Opinion Survey is scheduled to be released later today and will provide further insight into bank lending conditions.”
Geo-political risks could also be significant with a focus on Middle East tensions.
MUFG noted; “At the margin heightened geopolitical risks could be offering more support for the US dollar as well. Nevertheless, developments in the region still warrant close monitoring as the building risk of a broader conflict could eventually trigger bigger moves in the FX market.”
Scotiabank sees the risk of further GBP/USD selling; “A bearish close for the GBP Friday (outside range lower) and Cable losses below 1.26, lows that have held several times since mid -December, cast a negative technical cloud over the pound. Immediate risk for the pound is geared towards a drop back to 1.2500/25.”
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TAGS: Pound Dollar Forecasts