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Pound to Dollar Rate Secures Net Gain to 1.2370

April 23, 2024 - Written by David Woodsmith


European currencies have recovered some ground on Tuesday with increased optimism that strength in services will lead to a rebound in the economy.

Equities have also posted net gains with the FTSE 100 index posting a record high at 8075 before a limited correction. Stronger equities should help underpin the Pound to some extent.

In this environment, the Pound to Dollar (GBP/USD) exchange rate found support above 5-month lows and secured a net gain to 1.2370.

A crucial consideration will be whether the data triggers fresh adjustment in interest rate expectations and whether the Pound can resist renewed losses against a still firm dollar.

ING notes the shift in Bank of England rhetoric over the past few days; “it now seems we are hearing from BoE insiders – i.e., not the more vocal external members – that conditions are falling into place for a rate cut. This has shifted the probability of a June BoE cut close to 50% from 25% a week ago.”

ING notes that yields are a key driver for the Pound; “GBP/USD has been enjoying quite a steady relationship with the one-year GBP:USD swap differential. If that differential were to move out by a relatively aggressive 50bp in the dollar's favour, this would suggest that GBP/USD should be trading near 1.21.”

The UK PMI manufacturing index dipped to a 2-month low of 48.7 for April from 50.3 previously and below consensus forecasts of 50.4.

The services sector index, however, strengthened to an 11-month high of 54.9 from 53.1 in March and above consensus forecasts of 53.0.

Input price inflation accelerated sharply in April, with the strongest rate of increase for 11 months.

There was, however, a tentative moderation in the rate of increase in prices charged with the slowest rate of increase since February 2021.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence commented; “Early PMI survey data for April indicate that the UK economy's recovery from recession last year continued to gain momentum.

He was still cautious over inflation pressures; “Although selling price inflation cooled slightly, the upturn in costs alongside solid demand suggests firms may seek to raise prices in the coming months.”

He added; “While the improving economic recovery picture is welcome news, the upward pressure on inflation will add to concerns that a sustainable path to below target inflation has not yet been achieved.”

Fiscal policy will also be an important focus, especially with the General Election likely to be in October.

For March, the UK government borrowing requirement declined to £11.9bn from £16.6bn the previous year, but slightly above consensus forecasts.

Provisional 2023/2024 full-year data recorded a budget deficit of £120.7bn (4.4% of GDP) from £128.3bn last year, but above last month’s OBR estimate of £114.1bn.

According to Rob Wood, chief UK economist at Pantheon Macroeconomics; "We expect the Chancellor to cut taxes again before a likely October or November general election despite borrowing overshooting his forecasts."

He added; "We suspect whoever the next government is will end up pushing through at least some tax rises to balance the books."

The Institute of Fiscal Studies commented; “Even if borrowing falls substantially over the coming years as under official forecasts, this will barely be enough to stabilise debt as a share of national income, leaving a difficult inheritance for whoever is Chancellor after the election.”

The Euro-Zone PMI manufacturing index retreated to a 4-month low of 45.6 from 46.1 although there was a stronger output reading while the services-sector index increased to an 11-month high of 52.9 from 51.5.

As far as inflation is concerned, costs and selling prices increased at a faster rate in April.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented; “The eurozone got off to a good start in the second quarter.”
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