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Dollar Drifts Against European Currencies, Pound Sterling Holds Above 1.27

May 22, 2024 - Written by John Cameron


The Pound to Dollar (GBP/USD) exchange rate held firm on Monday and traded above the 1.2700 level on Tuesday, close to 2-month highs, as low volatility limited support for the dollar.

If dollar moves remain limited, GBP/USD moves will tend to be dominated by the UK inflation data and Bank of England (BoE) interest rate expectations.

The UK inflation data will be released at Wednesday’s European open.

Consensus forecasts are for the headline inflation rate to decline sharply to 2.1% from 3.2% previously with the core rate at 3.6% from 4.2%, both the lowest readings since 2011.

Lower than expected data would boost the potential for a June BoE rate cut and undermine the Pound, although the figure for services-sector inflation is likely to be pivotal for the overall reaction.

A stronger than expected reading would make it much more difficult for the BoE to cut in June and would trigger an initial Pound spike higher.

Ralf Preusser, global head of G-10 FX at Bank of America commented; “In the UK, it’s not that we have good evidence that inflation expectations are unanchored, but if there is a risk of them being unanchored anywhere, the UK would be it.”

According to Mark Dowding, chief investment officer at RBC BlueBay Asset Management; “we see a risk that this declines by less than many have hoped for. This could place enthusiasm for rate cuts onto more of a back burner.”

The US currency has been unable to make headway against European currencies amid confidence in the global and European economies and evidence that the UK economy is losing some ground.

Wells Fargo commented; “the composition of global growth is starting to change as the U.S. economy is showing clearer signs of deceleration, while major foreign economies are demonstrating signs of recovery. In our view, growth trends are changing and starting to swing toward international economies, and U.S. exceptionalism is starting to fade.”

As far as the dollar is concerned, investment banks expect relatively narrow ranges will prevail in the short term, especially given increased confidence in the international outlook.

MUFG commented; “We believe as long as global growth conditions do not deteriorate, the scope for the dollar to strengthen will remain limited.”

ING is slightly more positive on the dollar; “Despite some encouraging news on the US data side, our rates team continues to see upside risks for Treasury yields in the near term, and we are doubtful we’ll see much more USD softness into the end of May.”

Danske expects markets will wait for further key US data releases; “The next significant data releases to watch for are PCE inflation on 31 May, and ISM and non-farm payrolls at the beginning of June.”

Overall yield spreads will remain a key element for underlying currency moves.

MUFG commented; “The differences in cumulative easing remains relatively minor with the Fed priced to cut by 40bps by year-end compared to 56bps from the BoE and 67bps by the ECB.

It added; “We think each of the three central banks will cut by more than currently priced but based on current communications and the economic data available, current market pricing is reasonable.”

Overnight, Cleveland Fed President Mester stated that three interest rate cuts were unlikely for 2024.

MUFG commented; “It seems very clear that the median dot profile at the Fed meeting in June will likely drop for three rate cuts to two.”

MUFG does not see this will come any surprise, especially given market pricing and added; “As long we avoid the scenario of the Fed having to revisit the prospect of rate hikes, the likelihood is that FX volatility will remain low.”
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