Pound to Dollar: Hurt by Contrasting UK and US Inflation Releases

February 14, 2024 - Written by John Cameron

STORY LINK Pound to Dollar: Hurt by Contrasting UK and US Inflation Releases

The Pound to Dollar exchange rate fell back sharply for investors looking to sell Sterling on Wednesday. Inflation data on both sides of the Atlantic have been crucial over the past 24 hours.

US inflation data for January was stronger than expected which inflicted further damage to hopes for an early Federal Reserve interest rate cut.

In contrast, UK inflation data was slightly lower than expected with markets more confident that the Bank of England could cut interest rates in the second quarter of 2024.

Crucially with a shift in expectations, there is an increased possibility that the BoE will cut interest rates ahead of the Fed and this has been a key element undermining the Pound.

The Pound to Dollar (GBP/USD) exchange rate posted sharp losses to 1-week lows just below 1.2550.

The immediate focus will be on February lows near 1.2520 and the key 1.2500 level with GDP/USD vulnerable if support levels break.

UK consumer prices declined 0.6% for January after a 0.4% increase previously and compared with consensus forecasts of a 0.4% decline.

The headline year-on-year inflation rate held at 4.0% and slightly below expectations of a marginal increase to 4.1%.

The underlying rate held at 5.1% and marginally below expectations of 5.2%.

According to the ONS; “The largest upward contribution to the monthly change in both CPIH and CPI annual rates came from housing and household services (principally higher gas and electricity charges), while the largest downward contribution came from furniture and household goods, and food and non-alcoholic beverages.”

Food prices declined 0.4% on the month, the first decline since September 2021.

Inflation within the goods sector edged lower to 1.8% from 1.9% while the services sector figure was slightly higher at 6.5% from 6.4%.

Producer input prices declined 3.3% over the year while output prices declined 0.6%.

According to Martin Beck, chief economic advisor to the EY Item Club; “Disruption to shipping due to geopolitical tensions presents a potential risk to inflation’s descent. But with shipping costs only a tiny part of the price consumers pay for goods, that inflationary risk looks modest at present.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, commented; “It remains likely that the headline rate of CPI inflation will fall back to about 2.0% in April and then modestly undershoot the 2% target over the following six months.”

He added; “We continue to think that CPI outturns over the coming months will convince the MPC in the second quarter that monetary policy does not need to be quite as “restrictive” as it is currently, though it looks like a toss-up whether the committee will opt to cut bank rate for the first time in May or June.”

EY Item Club’s Beck added; “Overall, the latest inflation data should reassure the MPC that the time to start cutting interest rates is approaching. The EY Item Club continues to expect the first cut in bank rate in May.”

Investment banks have continued to react to the US inflation data.

According to ING; “A core inflation reading of 0.4% month-on-month and nearly 4% year-on-year is not a good look for a central bank preparing to cut rates. It is no surprise that the market has scaled back expectations for 2024 Fed easing to 90bp from a view of 160bp just three weeks ago.”

It added; “Given seasonal patterns favour the dollar in February and that the next big input into the Fed equation, the January PCE data, is not released until 29 February, it looks like the dollar will be able to hold recent gains for another couple of weeks.”

According to MUFG; “2yr spreads on government bond yields and swap rates have moved notably in favour of the US dollar implying continued dollar upside risks for now.”

Credit Agricole is wary over buying the dollar at current levels; “We think that some positives are in the price of the USD, and with the currency having reached and even exceeded our targets for Q1, we maintain our neutral outlook on the currency.”

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TAGS: Pound Dollar Forecasts