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Pound to Dollar: A Struggle to Hold 1.26

April 9, 2024 - Written by David Woodsmith


Given concerns that US inflation data will again rattle markets this week, GBP/USD may struggle to hold above the 1.2600 level.

The Dollar posted strong gains in an initial reaction to the US jobs data, but failed to hold the gains.

In this context, the Pound to Dollar (GBP/USD) exchange rate found support around 1.2575 and rallied back above the 1.2600 level.

ING noted the dollar’s failure to hold gains; “Perhaps investors are recalling Fed Chair Jerome Powell's answer to a question at the 20 March FOMC press conference, where he said that strong US jobs data would not delay rate cuts.”

April GBP/USD lows are around 1.2540.

It added; “More likely, however, is that investors are awaiting this Wednesday's release of March CPI data, where another high 0.3% month-on-month reading in core CPI data will further thwart the kind of benign conditions required for easing policy.”

The key US event this week will certainly be the consumer prices report due on Wednesday.

MUFG commented; “The week ahead could prove pivotal for USD direction through the rest of this month.”

Consensus forecasts are for headline prices to increase 0.3% on the month with the annual rate increasing to 3.4% from 3.2%.

Core prices are also forecast to increase 0.3% on the month with the annual rate edging lower to 3.7% from 3.8%.

There has been a further shift in short-term Fed expectations with markets cutting the chances of a June rate cut to around 50%.

From a longer-term perspective, ING commented; “Currently, the market prices just 62bp of Fed easing this year. The risks are clearly skewed to the market just pricing 50bp of Fed easing this year, pointing to the dollar staying stronger for longer.”

MUFG added; “A third consecutive month of stronger inflation at the start of this year would push back against that view and encourage the US rate market to continue paring back Fed rate cut expectations which has been encouraging a stronger USD at the start of this year.”

RBC Capital Markets commented; “Despite solid headline numbers, the Fed has been pointing to other indicators such as lower quits rate, falling job openings and moderating wage growth as signs of tight labor market conditions unwinding, and has maintained the assessment that risks with its dual mandate are coming into better balance.”

Nevertheless, it added; “The choppier the progress with inflation (as it has been in early 2024), the longer the Fed will need to hold rates steady.

The bank expects a June rate cut, but with the risk of a further delay.

Nordea considers whether the US is on track to beat inflation and added; “The problem today is that this does not seem like the most likely outcome. The current economic conditions do not seem consistent with 2% inflation on a sustainable basis.”

Persistent inflation would tend to underpin the dollar.

MUFG also noted the possibility that the latest consumer prices data will be weaker than expected.

It commented; “A development that would initially weaken the USD, maintain supportive market conditions for FX carry trades and could encourage further near-term gains for G10 commodity-related currencies.”

The latest COT data, released by the CFTC recorded a renewed increase in long, non-commercial Pound positions to near 43,500 contracts from just over 35,000 the previous week with renewed Pound buying interest.

Overall, there was a net increase in long dollar positions for the week.

Danske Bank commented; “CFTC positioning data has recently indicated a significant uptick in long USD positions, suggesting a potential asymmetrical outcome favouring a weaker USD in the short term, especially in response to potential lower-than-expected US data.”
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