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Pound to Dollar: "Trend Dynamics Still Leaning GBP-Bearish" say Scotiabank Techs

February 7, 2024 - Written by David Woodsmith


Positive Fundamentals Underpin the Pound, GBP/USD Exchange Rate Holds Above 1.2600

The Pound to Dollar (GBP/USD) exchange rate made further headway in Europe on Wednesday with a peak just above 1.2640.

Firm domestic data provided net currency support, but UK equities lost ground later in the session and GBP/USD retreated to 1.2620.

In comments on Wednesday, Bank of England Deputy Governor Breeden’s line was very similar to that of Governor Bailey and chief economist Pill.

According to Breedon; As I have become more confident that persistence is likely to evolve as embodied within our forecast, I have become less concerned that rates might need to be tightened further."

She added that she was encouraged by inflation pressure receding in other advanced economies.

Nevertheless, there was still an important element of caution before contemplating any cut in interest rates. She added; "But I need to see further evidence to be confident that the UK economy is progressing as set out in our forecast."

Breeden noted that she would be monitoring wage data and company pricing decisions closely in the coming months.

Jane Foley, head of FX strategy at Rabobank commented "The remarks from the BoE’s Breeden this morning also signal that she is in no particular rush to ease policy."

UK data releases have remained generally positive.

Halifax reported that UK house prices increased 1.3% for January after a 1.1% increase the previous month and compared with consensus forecasts of a 0.8% monthly increase and the fourth monthly increase in a row.

Prices increased 2.3% over the year, the strongest increase since January 2023.

Kim Kinnaird, Director, Halifax Mortgages, commented; “The recent reduction of mortgage rates from lenders as competition picks up, alongside fading inflationary pressures and a still-resilient labour market has contributed to increased confidence among buyers and sellers. This has resulted in a positive start to 2024’s housing market.”

She was still relatively cautious over the outlook; “Looking ahead, affordability challenges are likely to remain and further modest falls should not be ruled out, against a backdrop of broader uncertainty in the economic environment.”

Rabobank’s Foley added; "Further signs of resilience in the UK housing market from the Halifax survey underpin the view that the BoE won’t be in a hurry to cut rates."

Money markets overall see a 61% chance of a BoE rate cut in June.

There were no major US data releases on Wednesday while there was a slight change in Federal Reserve pricing.

Markets were pricing in just over a 20% chance of a cut at the March meeting and close to 70% of a May cut.

George Saravelos, head of FX research at Deutsche Bank expects the extent of rate cuts will be crucial. He noted; "Does it make sense for the market to be pricing similar cumulative rate cuts from the Fed, ECB (European Central Bank) and many other central banks, we don't think so."

He added; "The real debate is not if the Fed cuts a few weeks sooner or later, but if it cuts by less or more than the rest of the world over the next two years. We continue to see the risks skewed towards less Fed easing and, therefore, in favor of the USD."

According to Scotiabank; “Short -term spreads have moved in the USD’s favour since mid-January but there are signs that USD gains are overstating the improvement in fundamentals. Other factors, such as position adjustment, may be helping lift the USD tone—which suggests scope for additional USD is limited unless fresh USD-positive impulses develop.”

On GBP, Scotiabank added; “Regaining 1.26—the base of the trading range since mid-December—is a technical positive. There is work still to do, however, and trend dynamics are still leaning GBP-bearish. GBP gains through 1.2645/50 in the next day or so should bolster the GBP’s recovery and target additional gains to the upper 1.26s/low 1.27s.
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