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Scotiabank: "Pound Sterling Has Work to do to Show Some Real Technical Strength"

February 24, 2024 - Written by David Woodsmith


The Pound to Dollar exchange rate (GBP/USD) has been able to make headway on Thursday, although there has been an element of head scratching over market trends and GBP/USD has not been able to regain the 1.2700 level.

Wall Street posted strong gains on Thursday with a further surge in Nvidia pushing the S&P 500 index to a fresh record high.

Gains in equities helped underpin the Pound, but there were concerns that the gains were very narrow in nature.

US bond yields also moved higher which is usually negative for equities. If yields increase further, equities could come under sustained pressure.

According to ING; “One argument that we think makes sense at this stage is that once the Nvidia effect has faded, equity markets are left with increasingly stretched valuations as USD rates continue to rise.”

It added; “we believe high-beta currencies are looking expensive in the very short run. The prospect of unstable risk sentiment and a dollar leg higher ahead of next week’s PCE points to downside potential.”

The UK GfK consumer confidence index edged lower to -21 for February from -19 the previous month and compared with consensus forecasts for a further slight improvement.

Four of the five components declined while there was no change in the expectations for the personal financial position.

Joe Staton, client strategy director at GfK, commented; “The bad news is that the improvement in the Overall Index Score seen over recent months stalled slightly in February due to a fall across most measures. However, the good news is that optimism for our personal financial situation for the next 12 months has not slipped back.”

Kyle Chapman, forex analyst at Bellinger Group "The pound has consolidated at a higher level this morning, undeterred by an unexpected fall in GfK consumer confidence."

He added; "A global risk asset inflow keeps sterling buoyed despite a widening US yield advantage. FX has detached somewhat from rate spreads over the past few days.”

Market interest rate expectations have shifted again with the Bank of England now expected to lag the Federal Reserve and ECB following a run of generally positive UK data with less than a 50% chance of a June move.

Market confidence in an early cut in Federal Reserve interest rates has continued to fade.

There are now no expectations of a Fed cut in March while the chances of a cut in May have also dipped to below 25% from close to 100% in late January.

Fed Governor Waller made a series of comments on Thursday.

He did express some unease over inflation with comments that; “Considering all inflation aspects, 'I see predominantly upside risks' to the expectation inflation will keep moving to the 2% goal.”

He added; “Need to see a couple more months of inflation data to be sure if January was a 'fluke' and we are still on track to price stability.”

Waller also considered to preach caution and noted that he was “Puzzled by the narrative that delaying cuts for a meeting or two risks causing a recession and added; “there is no rush to begin cutting interest rates.”

Treasuries also remained under pressure in Asia on Friday with the 10-year yield close to 3-month highs at 4.35%.

Bonds did manage to rally early in US trading with the 10-year yield back near 4.30%.

Athanasios Vamvakidis, global head of G10 forex strategy at BofA Global Research commented; "It's not the time yet to sell the dollar, but we think it will start to weaken in the second quarter, assuming that the Fed will cut in June and continue cutting rates once a quarter."

BoA is, however, more nervous after the recent run of data releases and added; "If the U.S. economy remains so strong, we have to change our view, as the Fed might not be able to cut in June or not even this year."

In their latest FX analysis, FX strategists at Scotiabank discussing near-term GBP/USD technicals said;

"Sterling has drifted back from the mid/upper 1.26s where recent gains have peaked but a mild, short-term uptrend remains intact. The broader picture reflects a wide, flat range trade which means the pound has a lot of work to do to show some real technical strength. Gains through 1.2675/85 should be positive. Losses through 1.2520/25 turn the picture more negative."

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