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Pound to Dollar Rate Secures Gains Ahead of Key US Inflation Data

April 10, 2024 - Written by David Woodsmith


The Pound to Dollar (GBP/USD) exchange rate has edged higher to near 1.2685 on Tuesday as the dollar has lost ground against European currencies.

US yields have continued to move in favour of the dollar over the past 24 hours, but the US currency has failed to benefit and Scotiabank sees scope for further GBP/USD gains if there is a sustained break above 1.2665.

US developments are liable to dominate in the short term ahead of crucial UK data releases next week.

Market confidence in a June Federal Reserve rate cut has continued to edge lower with the chances now seen at just below 50%.

ING points out that markets also expect that other central banks will be influenced strongly by the Fed stance.

In this context, if expectations of a near-term Fed rate cut fade, traders also consider that other major central banks will delay their own rate cuts. This correlation tends to limit potential dollar support.

According to ING; “The case for a higher dollar in the near term is quite clear to us at this point, but we also cannot dismiss the possibility that a material USD rally will be delayed until the divergence between the Fed and other developed central banks becomes more evident. We’ll see whether dovish messages by the Bank of Canada tomorrow and the ECB on Thursday can assist a rotation back to the greenback; we suspect they will.”

ING added; “The US CPI release tomorrow is obviously a big risk event for the dollar, but if consensus is right and core MoM inflation prints 0.3%, the room for a dovish repricing in Fed expectations should shrink further.”

MUFG noted that markets may be wary of a weaker US inflation print; “After two upside surprises, there is an understandable caution over a potential weaker print that would quickly see June rate cut expectations increase again. But there also must be more to this reluctance than the imminent CPI release.”

Bank of America (BoA) expects the US core inflation rate will be held to 0.2% compared with consensus forecasts of 0.3%.

It added; “A report in line with our expectations would leave us more confident with our call for the Fed to start its cutting cycle in June.”

MUFG also notes potential scepticism over reported strength in US payrolls.

It points out that other US survey evidence has been much weaker and it suggests that the growth incidence of people holding multiple part-time jobs may be inflating payrolls data.

The latest NFIB small business confidence index, for example, declined to 88.5 for March from 89.4 and the lowest reading since December 2012.

Companies were more concerned over inflation, but the percentage of companies planning to create new jobs dipped again to the lowest level since May 2020.

MUFG also points to evidence of an improved European outlook. “Europe is emerging from very weak economic conditions triggered by the huge energy price shock and that will be an important factor support EUR and GBP which will help curtail USD buying.”

The British Retail Consortium (BRC) reported that like-for-like UK retail sales increased 3.2% in the year to March from 1.0% previously and above consensus forecasts of 1.8%.

According to BRC Chief Executive Helen Dickinson; “While retail sales growth improved last month, this was largely driven by Easter falling unusually early and the subsequent uplift to food sales in the week preceding the long weekend.”

Linda Ellett, UK Head of Consumer Markets, Leisure & Retail, KPMG commented Economic indicators are heading in the right direction with inflationary pressures easing and interest rates having potentially peaked, however consumer confidence remains fragile.
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