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Pound Sterling Supported by Buoyant Global Risk Conditions

May 17, 2024 - Written by John Cameron

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The Pound to Dollar exchange rate (GBP/USD) spiked higher in initial reaction to Wednesday’s US inflation data.

Although there was a quick correction, momentum built again late in the session with renewed dollar losses and gains for European currencies.

GBP/USD peaked at a fresh 5-week high of 1.2700 in early Asia before a limited correction to 1.2675.

There have been no significant domestic developments over the past 24 hours with global developments dominating.

Although the FTSE 100 index has corrected slightly lower on Thursday, overall risk appetite has remained robust amid hopes for a decline in interest rates in major economies.

US data has boosted confidence in Federal Reserve rate cuts and the strength in risk appetite has underpinned the Pound in global markets.

Reaction to Wednesday’s US consumer prices report has continued to dominate markets.

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Headline and core prices increased 0.3% for the month after 0.4% increases the previous month.

Following the data, there was a retreat in the 10-year yield to near 4.30% before stabilising just above this level.

There was a limited shift in short-term Fed interest rate pricing with the chances of a July cut around 30%.

Markets are also pricing in just over a 70% chance that rates will be cut in September while the most likely outcome is for two rate cuts by the end of 2024.

MUFG commented; “Together with the release of the PPI report for April earlier this week, the CPI report has reinforced expectations that the core PCE deflator for April released at the end of this month will also increase by similarly by around 0.2%-0.3%M/M. A welcome development for the Fed after recent stronger inflation readings when the core PCE deflator picked up to an annualized rate of 4.4% in Q1.”

The bank added; “Overall, the report has provided some much-needed reassurance to back up our view that inflation will slow further through the rest of this year and open the door for the Fed to begin cutting rates.”

Danske Bank commented; “Yesterday’s US CPI print provided some relief to the market as it was pretty much in line with expectations, an outcome that, when combined with softer retail sales figures for April, gave the Fed a little breathing space while also providing the market with some reassurance that rate cuts remain on the table.”

ING is more cautious over the outlook given the shift in expectations this month. It added; “Our preferred call at this stage is not for a continuation of a dollar decline until the end of May, but instead a period of quiet trading with little sense of direction and low volatility. That’s mainly because hard data is needed to move the needle substantially on Fed pricing, and the next key release – core PCE – is only on 31 May.”

According to Danske Bank; “Tight labour markets continue to support upside risks to core inflation despite signs of gradual easing. We expect central banks to take a cautious approach to cutting policy rates.”

Domestically, there will be an increasing focus on next week’s UK inflation data. There will be a sharp decline in inflation for the month due to base effects as the strong 1.2% increase in prices last year will come out of the calculation.

Retail energy prices also declined significantly in Aril which will push the inflation rate lower.

The headline rate is likely to fall to near or even below 2.0%.

The BoE will be watching the core inflation data closely with a particular focus on services.

Calls for a June rate cut will be deafening if there is a weaker than expected reading.
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