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Pound Sterling Surrenders Gains as US Bond yields Increase, Trades Below 1.2650 vs Dollar

March 27, 2024 - Written by David Woodsmith


The Pound to dollar exchange rate (GBP/USD) hit highs just below 1.2670 on Tuesday. It was unable to sustain the peak levels and retreated to 1.2630 after the US open with little net change on the day as the dollar pared losses.

There was a lack of underlying energy in markets with an underlying phase of consolidation after last week’s central bank policy meetings.

Scotiabank commented; Trading appears light, with markets not particularly incentivized to move the USD significantly higher, or that much lower, while monetary policy prospects remain unclear.”

US yields overall moved higher which helped underpin the dollar.

The bank noted GBP/USD support at 1.2625 with a break above 1.2660 needed to see gains to at least 1.2700.

There were no major UK developments on Tuesday with markets waiting for the PCE prices data due at the end of the week.

MUFG expects relatively narrow ranges will prevail, but added; “The main risk to that view would be if the Fed delays the start of their easing cycle in response to US inflation continuing to surprise to the upside at the start of this year which would encourage a stronger US dollar.”

US consumer confidence was reported at 104.7 for March compared with consensus forecasts of 106.9 and the February reading was revised down to 104.8 from the flash reading of 106.7.

The current conditions index strengthened for the month, butt here was a notable decline in the expectations component to 73.8 from 76.3 previously.

Figures below 80 for expectations are often considered a warning over potential recession.

Consumers were more confident over the current labour-market conditions, but expect conditions will deteriorate over the next few months.

Dana M. Peterson, Chief Economist at The Conference Board commented; “Consumers remained concerned with elevated price levels, which predominated write-in responses.”

Elsewhere, durable goods orders recovered 1.4% for February after a revised 6.9% decline the previous month while core orders increased 0.5% and close to market expectations.

The Richmond Fed manufacturing index dipped to -11 for March from -5 previously and weaker than expected of -5.

Orders recorded a sharp decline on the month while inflation pressures eased on the month.

Although data was mixed at best, US Treasuries lost ground with bond yields moving higher.

ING noted Fed comments from Atlanta Fed President Bostic over the weekend who stated that he is only expecting one rate cut this year. The bank added; “the dollar did not benefit from the remarks, and we suspect that while a core PCE at 0.3% month-on-month (our call and consensus) on Friday shouldn’t do much to encourage dovish bets, the dollar looks more likely to stabilise than stage another rally at this point.”

According to ING; “We had deemed last week’s dollar rally as overdone given the relatively dovish Federal Reserve message, and we are not surprised to see the greenback decline at the start of this week.”

Credit Agricole considers that the overall data flow will underpin the US currency. According to the bank; “All in all, the US cyclical superiority vis-à-vis most other developed economies should in our view continue to play in the hand of the USD, as we continue to lean towards buying any eventual USD dips that a usually negative April seasonality could possibly spur further down the road.”

Danske Bank still sees scope for near-term dollar losses as pressure for a rate cut builds. According to Danske; “We see room for markets to price in a higher probability of an early cut due to a significant uptick in labour supply, easing shortages, and expected lower wage sum growth. Lower global real rates and fewer positive economic surprises from the US indicate potential near-term USD weakness.

The bank still expects longer-term dollar gains.
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