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Pound Sterling Outlook: Tensions Building Ahead of Next Week’s Crucial Inflation Data

May 19, 2024 - Written by John Cameron


The dollar overall recovered ground on Thursday with a sense that markets may have overreacted to Wednesday’s US inflation data.

From the Pound's perspective, tensions were building ahead of next week’s crucial inflation data.

The Pound to Dollar (GBP/USD) exchange rate hit fresh 5-week highs at 12700 in Asia on Thursday before a retreat to just below 1.2650.

Nordea expects GBP/USD will weaken to 1.22 on a 3-month view as the Fed rejects rate cuts while Europe moves to lower borrowing costs.

The Pound to Euro (GBP/EUR) exchange rate was held in relatively narrow ranges and settled around 1.1650.

ING commented; “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.”

Markets continued to debate the outlook for Bank of England interest rates with rhetoric watched closely.

According to External MPC member Greene; “In considering for how long we must retain our restrictive stance before policy should be eased, I think the burden of proof therefore needs to lie in inflation persistence continuing to wane."

The rhetoric overall appeared slightly more dovish than previously, although there is unlikely to be a major shift in expectations until the key inflation data next week.

Headline inflation will inevitably decline sharply to around or even below 2% given favourable base effects and the impact of lower retail energy prices from the beginning of April.

The key for markets and the BoE is likely to be core data on services-sector inflation, especially as there will be price increases through annual indexation at this release.

HSBC expects confidence in a June rate cut will increase; “The market is priced for a 60% chance of a rate cut at the June meeting. Our economists expect a rate cut to come in June, suggesting there is still some GBP downside ahead.”

US economic developments will also be crucial for European currencies in general and the Pound in particular.

Initial jobless claims declined to 222,000 in the latest week from a revised 232,000 previously, but slightly above consensus forecasts of 219,000 while continuing claims edged higher to 1.79mn from 1.78mn.

Housing starts recovered to an annual rate of 1.36mn for April from a revised 1.29mn previously, but this was below expectations of 1.42mn while building permits were also weaker than expected at 1.44mn from a revised 1.49mn for March.

The Philadelphia Fed manufacturing index declined more than expected to 4.5 for May from 15.5 previously and below forecasts of 7.8.

New orders slipped sharply back into contraction while employment and weekly hours also declined on the month.

Overall price readings were mixed on the month. There is little net change in the outlook while inflation pressures are expected to ease.

HSBC commented; “There have been clear signs of improvement in the data across Europe, but it is noticeable that the upside surprises are only evident in the surveys. If we isolate “hard” data releases from the Eurozone, the recent numbers are still coming in below expectations. The opposite pattern is evident in the US where hard data releases continue to come in above consensus, but there have been some weaker-than-expected survey numbers.

It adds; “There are different ways to spin this. One could argue the US experience is preferable – better to have actual data stronger than anticipated. Or perhaps the Eurozone’s mix is better if we assume survey data gives a better picture of the future, and that hard data is simply a rear-view mirror.”

Nordea does not expect a Fed rate cut until December 2024 given persistent inflation pressure.
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