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Pound to Dollar: Low/mid 1.25s up Next?

February 9, 2024 - Written by David Woodsmith


European currencies posted fresh losses on Thursday while the dollar posted net gains with a strong advance against the yen with USD/JPY breaking above the 149.00 level for the first time in over two months.

In this environment, the Pound to Dollar (GBP/USD) exchange rate dipped back below the 1.2600 level to trade around 1.2580.

This retreat will put the focus back on 8-week lows just above 1.2520 posted earlier in the week.

As far as US data is concerned, initial jobless claims declined to 218,000 in the latest week from a revised 227,000 the previous week and compared with consensus forecasts of 221,000.

Continuing claims declined to 1.87mn from 1.89mn.

The data overall did not suggest significant deterioration in the labour market which helped underpin the US currency.

According to Scotiabank; “there are some tentative signs of a generally firmer USD emerging in trading today.”

ING has flagged the importance of US consumer prices revisions due on Friday and added; “We suspect the dollar will continue to trade on the firm side heading into this 08:30ET release on Friday - but the dollar could sell off afterwards and risk assets could rally, should these revisions not upset the US disinflation story.”

Scotiabank added; “markets may be giving the USD a bit of a lift ahead of tomorrow’s annual US CPI revisions—not usually a big issue for markets until last year’s surprising and quite significant upward revisions.”

According to Colin Asher, senior economist at Mizuho "Central banks need to be convinced that, not only will inflation come down, but that it will stay down."

He added; "The pricing of UK short-term interest rate expectations for H1-24 looks reasonable to us. However, expectations for EUR and USD policy cuts look a little overcooked, which may weigh on GBP in the near term."

Kyle Chapman, FX markets analyst at Ballinger & Co commented; "Now that the dust has settled on non-farms, I think what we are seeing is a recalibration of the rates outlook through to next year which has lifted the dollar into a range that is a level higher."

As far as UK data is concerned; “The UK RICS housing index improved further for January with the headline index improving to -18% from -29% the previous month and compared with consensus forecasts of -24%.

New buyer enquiries were at their strongest in almost two years and all major metrics recorded significant improvement for the month.

RICS senior economist Tarrant Parsons commented: “The UK housing market has seen a continued improvement in buyer activity through the early part of the year. Although sales volumes through much of the year ahead are likely to remain relatively subdued, the outlook has now turned modestly brighter on a consistent basis over the past few survey reports.”

He still voiced a significant element of caution; “However, this is not to say that mortgage affordability isn’t still a significant challenge, and any further unwelcome surprises with regards to inflation may still cause interest rate expectations to be revised. That would then pose a significant risk to any prospective recovery in the months ahead, even if the current prognosis is to see a further pick-up in activity levels.”

Despite evidence of a housing recovery, Bank of England MPC member Dhingra is still backing a cut in interest rates.

According to Scotiabank; “The data support the idea of a clearer rebound in housing activity in the UK as consumers anticipate BoE easing in the months ahead.”

On GBP/USD Scotiabank added; “The figure area is holding for now but short-term price signals do suggest the move higher has stalled in the short run. Weakness through 1.26 may see losses extend back to the low/mid 1.25s again.”
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