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US Dollar Drifts Lower as Volatility Collapses, Pound Rate Edges Higher

February 26, 2024 - Written by Frank Davies


The Pound to Dollar (GBP/USD) exchange rate has edged higher during Monday, although the main feature has again been very narrow ranges with resistance at the 1.2700 level and consolidation around 1.2680.

The dollar overall has drifted lower against European currencies with low volatility encouraging flows out of the US currency.

Month-end position adjustment could undermine GBP/USD over the next 24-36 hours amid corporate dollar buying.

Later in the week, the US PCE prices data will be released and this is an important inflation reading.

According to ING, wider dollar support is likely; “We see downside risks for GBP/USD as PCE inflation data in the US could help the dollar, with the pair potentially testing the 1.2530 14-February low.”

The UK CBI retail sales survey improved to a 10-month high of -7 for February from an extremely weak reading of -50 for January and compared with market expectations of -33.

Retailers are still negative surrounding the outlook with the index expected at -15 for March.

Selling price inflation moderated to its lowest since mid-2021.

CBI Principal Economist Martin Sartorius commented; “The slump in retail activity eased in February following an exceedingly dreary start to the year. Nevertheless, with sales expected to continue falling next month, retailers are still planning to reduce headcount and investment going forward.”

Scotiabank considered the data marginally positive; “Underlying trends are still relatively weak but UK consumer activity may be perking up a little as cost of living pressures ease and households anticipate lower interest rates ahead.”

MUFG commented; “we are more optimistic that the outlook for the UK economy is improving at the start of this year. Leading indicators such as the PMI surveys have been signalling that growth is picking up which creates a more supportive backdrop for the GBP.”

DailyFX strategist Richard Snow commented; "Sterling has performed well over the last week and with little to no ‘high impact’ data on the horizon, the currency may remain propped up on the whole.”

The UK budget will be presented next week with limited tax cuts amid a very challenging longer-term outlook for fiscal policy.

Nomura commented; "A modest rearranging of the fiscal deck chairs is likely to be the Chancellor’s most effective plan for Budget 2024, alongside a modest support package."

As far as US data is concerned, new home sales came in at 661,000 for January compared with consensus forecasts of 680,000 while the December figure was revised down to 651,000 from the original reading of 664,000.

Scotiabank noted a slightly weaker dollar trend; “nominal and real interest rate spreads have shifted against the USD somewhat through February so far. The moves are limited but enough to curb the USD’s ability to continue strengthening, absent other supportive drivers. Seasonally-positive trends for the USD will also start to wane as Q1 winds down.”

Commonwealth Bank of Australia currency strategist Carol Kong is more positive on the dollar; “If anything, the (data) may be stronger than markets currently expect, and that will likely give a modest boost to the dollar."

Commerzbank looks ahead to the US inflation data this week and considers an asymmetric risk for the dollar with a bigger reaction if the data is weaker than expected. According to the bank; “Another upside surprise in the PCE deflator would reinforce the picture of stubbornly high US inflation. It would confirm the USD strength we saw after the CPI numbers, but which is now fading.”

The bank considers the US inflation data for January was distorted and added; “If the PCE number were to confirm suspicions, the whole nice story behind the recent USD strength would be called into question.”

On GBP/USD Scotiabank added; “Last week’s peaks remain a block on near-term gains, however. Spot will have to push on through 1.2710 to show some additional technical momentum and perhaps stretch gains to test the upper end of the broader 1.2525-1.28 range in play.”
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