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Pound Sterling Outlook Today: Interest Rate Expectations Dominate GBP vs EUR, USD

May 28, 2024 - Written by John Cameron


The Pound to Dollar exchange rate (GBP/USD) has made further headway and traded around 1.2765 on Tuesday, close to 2-month highs near 1.2785.

The Pound has continued to gain net support from an unwinding of expectations that the Bank of England will be in a position to cut interest rates at the June policy meeting.

The dollar has also not been able to make any headway against European currencies, but US and UK interest rate expectations are still in a state of flux and any renewed shift would have important implications for the Pound.

In this context, the potential for an August BoE move is liable to cap gains.

ING commented; “Our view is that economic data next month will prove supportive of a rate cut in August.”

There has been some evidence of positive UK inflation developments.

The British Retail Consortium (BRC) shop-price index recorded an increase of 0.6% in the year to May from 0.8% previously and the lowest reading since late 2021.

The figures also showed that food inflation fell for the thirteenth month in a row to 3.2%.

According to BRC chief executive Helen Dickinson; “Shop price inflation has returned to normal levels.”

She added; “In non-food, retailers cut furniture prices in an attempt to revive subdued consumer demand for big-ticket items, and football fans have been able to grab some bargains on TVs and other audio-visual equipment ahead of this summer’s Euros.”

Mike Watkins, head of retailer and business insight at NielsenIQ commented; "The unseasonable weather has dampened retail sales so lower prices look set to continue and promotional activity is likely to increase drive demand.”

US developments will also continue to be watched closely.

In particular, the latest US PCE prices data is due for release on Friday.

Consensus forecasts are for a monthly increase in prices of 0.2%. A higher than expected reading would trigger fresh concerns over inflation.

Rodrigo Catril, senior FX strategist at National Australia Bank commented; "The market is well priced for a benign number, and that needs to be delivered for current Fed cut expectations for this year to be sustained."

He added; "Any number that surprises on the topside, we think, will provide quite a big reaction in terms of a move up in U.S. yields and for the dollar to rip higher."

According to Rabobank; “A few weeks ago we suggested it appeared as if US Fed Chair Powell was entering round 12 of a very long and drawn-out fight. Last week’s Fed minutes from the April meeting combined with red hot PMI data in the US all but assured us that the stagflationary picture is increasingly vibrant and round 13 is all but assured.”

Growth data will also be important with expectations that the May consumer confidence data due for release on Tuesday will retreat to a 22-month low.

According to Danske Bank; “A slightly later start to interest rate cuts seems well in line with signals from the members of the Federal Open Market Committee (FOMC), who predominantly signal patience while waiting for clearer indications that inflationary pressures are subsiding.”

It added that the situation is finely balanced; “The first faint sign of this was (perhaps) visible in the April CPI release, where the underlying inflation measures saw some softening. Simultaneously, job creation fell back slightly, although the level of +175,000 in April is still too high to genuinely alleviate pressure on the economy's capacity. We believe in a slightly softer data development from here, but not to an extent that seriously forces a swift easing of policy.”

As far as Federal Reserve expectations are concerned, markets are pricing in only close to a 10% chance of a July rate cut and a marginal chance of a rate hike.

The chances of a September cut are seen at very close to 50%.
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