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Pound to Dollar: Slips as Wall Street Rally Boosts US Exceptionalism

February 23, 2024 - Written by John Cameron


The Pound to Dollar exchange rate (GBP/USD) jumped to 20-day highs above 1.2700 in early Europe on Thursday, but failed to hold the gains and retreated sharply to around 1.2620.

US data was mixed, but the narrative of strong US asset prices was reinforced by another round of strong Wall Street gains as the S&P 500 index posted a fresh record high.

Although strong risk appetite can weaken the dollar, the US currency secured fresh support during the day as earlier sellers were forced to cover positions.

The US manufacturing PMI index improved to a 10-month high of 51.5 for February from 50.7 previously and above consensus forecasts of 50.5.

The services sector, however, retreated to a 3-month low of 51.3 from 52.5 and below expectations of 52.4.

The overall rise in output charges was historically muted, and the second-slowest since June 2020, as firms sought to drive new sales with concessions and discounts as requested by customers.

According to Chris Williamson, Chief Business Economist at S&P Global Market Intelligence; “The early PMI data for February indicate that the US economy continued to expand midway through the first quarter, pointing to annualized GDP growth in the region of 2%.

Williamson was broadly optimistic over inflation trends; “The survey’s gauge of selling prices for goods and services continues to run at a level consistent with the Fed hitting its 2% inflation target, and a further fall in cost growth to the lowest since October 2020 hints at price pressures remaining subdued in the coming months.”

Initial jobless claims declined to 201,000 in the latest week from a revised 213,000 previously and below consensus forecasts of 217,000 while continuing claims also declined to 1.86mn from 1.89mn.

Rubeela Farooqi, chief U.S. economist at High Frequency Economics commented; “The labor market remains strong although there is a gradual rebalancing of supply and demand for workers, welcome news for policymakers."

Existing home sales increased to an annual rate to 4.00mn for January from 3.88mn previously.

Jane Foley, head of FX strategy at Rabobank commented; "The dollar has come a long way, and the market is taking a breath."

She added; "What could potentially change that is if we have a further build-up of that debate about U.S. interest rates, and whether June (for the first rate cut) is realistic. The next round of U.S. data is going to be instrumental. We continue to think that the dollar will get a second wind."

The UK PMI manufacturing index edged higher to a 3-month high of 47.1 from 47.0 previously, although this was slightly below expectations of 47.5 while the services-sector index held at 54.3 and met expectations as it equalled an 8-month high.

The composite index hit a 9-month high and overall business confidence hit a 12-month high.

Average cost burdens increased at the fastest pace for six months with important pressures from higher labour costs while the increase in output charges was the strongest since July 2023.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence commented; “UK economic growth has accelerated in February. The survey data suggests that the UK’s ‘recession’ is already over.”

Williamson noted a stronger increase in prices and added; “With growth accelerating and prices on the rise again, February's data mean policymakers are increasingly likely to err on the side of caution when considering the appropriateness of cutting interest rates.”

ING took a similar view; “The bottom line is that we’re likely to see a return to modest, positive growth rates from the first quarter of this year. That likely means an end to the small technical recession experienced through the second half of 2023.”

On interest rates the bank added; “We expect services inflation and wage growth to remain sticky in the near-term, though both should show further progress lower by the summer. We are forecasting the first rate cut in August.”
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