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ECB Decision: Pound to Dollar Rate Needs Hawkish Guidance to Break Above 1.28

June 7, 2024 - Written by John Cameron


The Pound to Dollar exchange rate (GBP/USD) has again been unable to hold above the 1.2800 level and traded around 1.2780 on Thursday.

Domestic developments have remained limited with the 80th anniversary of D-Day commemorations taking immediate heat out of the General Election campaign.

Global developments are again likely to remain dominant on Thursday.

The ECB policy decision will be important for European currencies and have an important GBP/USD impact.

There are very strong expectations that the central bank will cut the refi interest rate by 25 basis points to 4.25% with any other decision a major surprise.

According to ING; “Should they surprisingly hold, the euro could face a brief earthquake.”

Assuming there is a rate cut, forward guidance from the bank on the potential for further rate cuts will be a crucial element.

ING commented; “We think it is likely there will be almost no new forward guidance, with the ECB potentially signalling any further easing would only be gradual and that there are still risks to inflation.”

If there is relatively hawkish rhetoric, there is the potential for EUR/USD to make headway which would also tend to drag GBP/USD higher while dovish talk would hurt GBP/USD.

US economic developments will also be a key element for the US dollar.

The data released on Wednesday indicated that the labour market is continuing to soften with ADP reporting a 152,000 increase in private payrolls for May.

There was, however, a strong than expected reading for the ISM services-sector business confidence index with a strong rebound to 53.8 from 49.4 previously.

MUFG commented; “The improvement in business confidence in the service sector helped at least temporarily to ease some of the building concerns over slowing growth momentum in the US at the start of this year.”

ING notes evidence of a weaker labour market; “It seems firms remain reluctant to add additional workers and again points to a cooling of employment in Friday’s jobs report - as did the softer than expected ADP employment number.”

It added; “It also, perhaps, suggests again that the surge in business activity seen in today’s May report is not seen as sustainable, hence why we should indeed take an average of April and May.

MUFG notes that the dollar failed to hold gains and commented; “It supports our cautious outlook for the US labour market and will leave market participants wary of the risk of a softer NFP report on Friday. It helps to partly explain why the US dollar failed to sustain initial gains.”

There will be further data on Thursday with the latest data on jobless claims, although the overall impact should be limited.

Friday’s jobs data will be the key focus with consensus forecasts for an increase in non-farm payrolls of around 185,000 from 175,000 previously.

The unemployment rate is expected to remain at 3.9% with a 0.3% increase in average hourly earnings.

Weaker than expected data would trigger fresh dollar selling on stronger expectations of a Fed rate cut.

At this stage, the chances of a July rate cut are seen at only around 16% with above a 65% chance of a move in September.

HSBC commented; “Clearly, the market has a heightened sensitivity to data releases, but the key for the Fed is inflation, which remains sticky. Softer economic activity will reassure policymakers that inflation should move lower in future, but without confirmation of lower inflation, policy is likely to remain patient.”

The UK data flow will remain very limited until the latest UK labour-market data on Tuesday and GDP data on Wednesday. The Bank of England will remain silent ahead of the June 20th policy decision.
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