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Pound Sterling Forecast: Volatility to Remain Elevated

April 16, 2024 - Written by David Woodsmith


Pound Volatility to Remain Elevated, GBP/USD Attempts to Recover from 4-Month Lows

The Pound to Dollar exchange rate (GBP/USD)came under sustained pressure on Friday with a slide below 1.1500 and 4-month lows just above 1.2425.

The dollar continued to see strong buying following the shift in Federal Reserve expectations.

GBP/USD has recovered to 1.2480 on Monday but will need to establish a position back above 1.2500 to ease underlying downward pressure.

According to Scotiabank; “A technically bearish close for the GBP on the week and—perhaps more importantly—a clear break under the 1.25 support zone that has underpinned the GBP for months leaves Cable prone to more weakness. Support sits at 1.2465—50% retracement of the pound’s Q4 rally. Below there, a return to the 1.22/1.23 range is a risk.”

After a spike in volatility last week, investment banks do not expect a quick return to narrow ranges. According to MUFG; “We start this week with certainly greater anticipation of increased FX volatility after a big move stronger for the US dollar last week.”

UK data releases this week will also be a key component in triggering Pound moves.

Moves in gold, oil and equity markets will also be important for near-term Pound direction.

ING notes that there has been no follow through in markets following the weekend Iranian missile strikes on Israel. Nevertheless, it adds; “Yet it looks too early to conclude that Middle East tension has found some kind of new equilibrium, and we suspect implied FX volatility will stay better bid for some time. The episode also serves as a reminder that the dollar is the best safe-haven currency right now—offering liquidity, high yields, and protection from US energy independence.”

US data releases will also be monitored during the day with the latest retail sales report and New York Empire manufacturing survey.

According to ING; “after last week's high US inflation data it is doubtful that any kind of weakness in retail sales data today can substantially move the needle on expectations for the Fed this year.”

ING added; “In all then there seems little reason for the dollar to hand back recent gains.”

MUFG expects the US currency to maintain a firm short-term tone, especially with scope for speculative buying; “The path for further US dollar appreciation from here remains clear with the US CPI data forcing markets into a rethink on the starting time for the first rate cut from the Fed.”

The bank still doubts whether dollar strength will be sustained as it expects a turn in the US data.

According to MUFG; “But we see the change in Fed view as only a delay and by July we will have had three further rounds of inflation data and jobs data that should be favourable enough to justify easing.”

The UK will release the latest labour market and consumer prices inflation data this week with the jobs data on Tuesday. The key element will be whether it triggers a shift in Bank of England interest rate expectations.

According to ING; “Given that market pricing for a June BoE rate cut is just 31%, conversely, any downside surprise on wages or services data could hit sterling quite hard.”

Consensus forecasts are for headline annual wages growth to slow to 5.5% from 5.6%.

The latest COT data released by the CFTC reported a renewed decline in long Pound positions to a 3-month low of just above 28,000 contracts from near 43,500 the previous week.

This positioning may limit the scope for near-term Pound selling.

Nevertheless, ING added; “GBP/USD now looks quite vulnerable, with next downside targets in the 1.2365/75 area.

According to RBC; “a daily close below 1.2500 would suggest that a top has formed, exposing 1.2449 and 1.2374 next on the downside.”
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