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Pound to Dollar: Support at 1.2530 "Looks Firm on Long-Term Chart"

February 17, 2024 - Written by John Cameron


The Pound to Dollar (GBP/USD) exchange rat briefly spiked higher after the UK retail sales data, but failed to hold the gains and retreated to near 1.2550 after stronger-than-expected US data.

Strong UK data failed to boost the Pound and a sharp 1.3% advance for the FTSE 100 index also failed to provide support.

As far as US data releases are concerned, producer prices increased 0.3% for January compared with expectations of 0.1% with the year-on-year increase at 0.9% compared with expectations of 0.6%.

Underlying prices increased 0.5% compared with forecasts of 0.1% with an annual increase of 2.0% from 1.7%.

The stronger-than-expected data triggered fresh jitters over inflation trends with significant losses for Treasuries as the 10-year bond yield increased to around 4.33%.

The potential for a May Fed interest rate cut also declined further to below 35% following the data.

Derek Halpenny, head of research, global markets EMEA at MUFG commented; “In a backdrop of near recessionary conditions in Europe and Japan and a real estate crisis in China, we would continue to see upside risks for the dollar."

According to Scotiabank; “while the DXY still looks stretched to me from a short-term valuation perspective but it’s hard to exclude the risk of the USD staying firm for a bit longer at this point—certainly while US yields remain relatively elevated.”

UK retail sales volumes increased 3.4% for January after a revised record December slide of 3.3%.

The monthly rebound was much stronger than the expected increase of 1.5% and the strongest monthly growth since April 2021.

Sales volumes still fell 0.2% in the three months to January from the previous three months, although this was the smallest decline since August 2023.

ING overall is more positive over the UK outlook. It noted; “Headline inflation will dip below 2% in the second quarter, in thanks partly to a sizeable prospective fall in energy bills in April. Wage growth, meanwhile, is proving much stickier.”

It added; “While we shouldn’t get too carried away – not least because the jobs market will continue to cool gradually – an improved consumer backdrop should help the UK economy return to modest growth through 2024.”

HSBC noted that the Pound was unable to hold initial gains; “it is questionable how much solace GBP can take from UK activity data given the overall picture remains weak, yet the challenge to bring services and core inflation lower remains evident.”

The bank added; “For GBP to be flat after a bumper bounce in retail sales says a lot.”

SocGen is more constructive on the outlook outside the US which should limit dollar support; “Worrying data are also, all in the rear-view window. Even the UK economy is on an improving path, even if it still underperforms.

Scotiabank maintains reservations over the UK outlook; “The data suggest the economy may be recovering from the late year drop in activity but trends remain soft.”

The bank also pointed to political risks; “two significant by-election losses for the ruling Conservatives overnight might lift speculation that the government will go for an early election this year– before prospects get even worse.”

There will certainly be an increased focus on the March 6th UK budget, especially given increased pressure for more aggressive tax cuts.

ING commented; “Our current thought is that this may be sterling positive – in that large, credible tax cuts are welcomed. If Chancellor Jeremy Hunt misreads the market, however – e.g., offers more than £20bn in tax cuts – sterling and the gilt market could come under pressure again.”

On GBP/USD Scotiabank added; “Sterling support at 1.2530 looks firm on the long-term chart now but Cable is still nursing a net loss on the week and spot has struggled to hold minor gains on the session. A clear move above 1.2610 would give the pound a bit more technical support.”
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