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Pound to US Dollar Exchange Rate Forecast: UK CPI This Week

May 19, 2024 - Written by Frank Davies


The Pound to Dollar exchange rate GBP/USD jumped after the latest US inflation data and, after a correction, there was a fresh advance to 5-week highs just above the 1.27 level.

Danske Bank expects GBP/USD will weaken to 1.17 on a 12-month view while ING expects the pair will be held to 1.25 as the Pound loses ground in global markets.

Both banks expect the Bank of England (BoE) will cut rates more than the Federal Reserve this year.

According to ING; “The core story here is that the UK is running a negative output gap – making the BoE far more likely to cut rates earlier and deeper than the Fed. This should keep GBP/USD subdued.”

UK economic conditions will certainly remain a key influence.

According to the latest labour-market data average earnings growth held at 5.7% compared with expectations of a decline to 5.4%.

The unemployment rate increased to 4.3% and payrolls continued to decline.

HSBC expects that a weaker labour market will have implications for the BoE.

According to HSBC; “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.”

In comments during the week, Bank of England Chief Economist Pill stated that there was the potential for a cut in interest rates during the Summer.

MPC member Greene stated that further evidence of moderating inflation was needed before interest rates could be cut.

The latest UK inflation data will be released in the week ahead with expectations that the headline rate will slide to near 2.0%.

The data will have a pivotal impact on BoE rate expectations.

Danske commented; “By extension, our long-held view of inflation not set to develop materially different in the UK compared to peers is increasingly materialising.

The bank expects three BoE rate cuts in 2024 with the first cut in June, sapping Pound support.

RBC commented; “Although the June meeting is ‘live’, our economists retain their call for the BoE to start cutting in August and deliver a total of -50bps this year.”

The bank added; “we view the risks skewed to the downside for GBP as long as UK’s imbalances continue to require persistent capital inflows and the UK resumes running ‘triple’ deficits.”

As far as the US economy is concerned Nordea commented; “On inflation, the Fed would probably need to see at least 3 months of 0.2% MOM or lower prints on core CPI to regain the confidence they had in December that inflation is on its way to 2%. That means that the July meeting is off the table and that September is the earliest we could see the Fed cutting.”

RBC notes a potential market bias; “the outsized reaction to this week’s jump in initial jobless claims shows how low the hurdle is for softer data hurting USD and conversely how high the hurdle is for further USD gains.”

Nevertheless, it expects the dollar will hold firm given the overall US fundamentals.

ING added; “the softening macro outlook could become a driver later next week. The preliminary S&P PMIs for May will provide a read on sentiment after the April ISMs slipped below the 50 threshold two weeks ago, signalling contraction.”

ING did, however, add; “we still think there is not enough thrust from US data to justify a significantly weaker greenback just yet.”

HSBC commented on the potential impact of loose financial conditions.

According to the bank; “while the USD has been supported by yields, the improvement in global growth and elevated risk appetite pose downside risks should they get greater traction. After all, the USD is a safe-haven that should wilt with equities at these levels.

HSBC, however, also pointed out that looser financial conditions will have an impact on the US economy and could force the Federal Reserve to tighten policy further.
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