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Pound Sterling Retreats vs Euro, U.S. Dollar on Bank of England Nerves

May 7, 2024 - Written by Tim Boyer


After spiking to 3-week high just above 1.2630 after Friday’s US jobs data, the Pound to Dollar (GBP/USD) exchange rate was unable to hold the gains and retreated to around 1.2535 on Tuesday as UK markets re-opened following Monday’s market holiday.

Risk appetite remains strong with the FTSE 100 index posting a fresh record high which will help limit Pound selling.

The US calendar is light this week with risk conditions and the Bank of England (BoE) policy decision likely to dominate GBP/USD moves.

Based on short-term yield spreads, MUFG data indicates that GBP/USD should be trading close to 1.22.

Scotiabank, however, considers a positive outlook; “Sterling remains on track for a push higher to 1.27+.”

The latest Barclays consumer data recorded that total UK consumer spending declined 4.0% in the year to April after a 3.5% March increase with like-for-like sales declining 4.4% after a 3.2% gain in March.

The annual spending increase was the weakest since February 2021.

According to Barclays; “Dismal weather and disappointing sales led to a depressing start to spring for retailers, even accounting for the change in timing of Easter.”

MUFG still noted a more positive overall outlook for the economy; “UK GDP growth is on track to exceed the BoE staff forecast of 0.1% for Q1, and growth momentum appears to be strengthening further at the start of Q2.”

Nevertheless, MUFG sees a relatively dovish BoE stance this week; “we do not expect the recent data flow to prevent the BoE from delivering a more dovish policy signal this week indicating they are moving closer to cutting rates.”

MUFG notes the possibility that other members will join Dhingra in voting for a rate cut.

It will be difficult to secure a majority on the MPC, but a narrow vote in favour of unchanged rates would trigger much stronger expectations of a cut in June.

MUFG added; “A more dovish BoE policy update poses downside risks for the pound in the week ahead.”

Political developments are unlikely to have a major impact with no change in expectations of a comfortable Labour Party General Election win.

Paul Donovan, chief economist of UBS Global Wealth Management commented; "The challenges facing current UK Prime Minister Sunak in the aftermath of local elections are unlikely to excite investors, who seem comfortable in their expectations around the forthcoming general election."

ING added; “Lower volatility pumps more air into carry trade strategies. Here, the dollar does OK since it offers the highest short-term deposit rate in the G10 space. The New Zealand dollar and British pound should also out-perform in this environment, although the pound faces an event risk from Thursday's Bank of England meeting.”

As far as the BoE is concerned, ING commented; our core view is that it will still be a little early for the BoE to shift its cautionary position and signal a June rate cut. The preference of our UK economist, James Smith, remains that the BoE cuts in August rather than June.”

It added; “However, a June BoE rate cut is only 30% priced by the market and we doubt sterling has to rally too hard if the BoE's language on Thursday is unchanged.”

In comments on Monday, Richmond Fed President Barkin stated that inflation data has been disappointing this year and that the job is not yet done.

He noted that businesses are still looking to raise prices if they can, and the Fed has more time to gain confidence that inflation is moving towards 2%.

Barkin, therefore does not expect an early cut in interest rates, but considers that a rate hike is unlikely. Fed expectations will limit scope for dollar selling.
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