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Pound to Dollar Exchange Rate Forecast: Retreat from 3-Month Best

June 14, 2024 - Written by David Woodsmith


Pound Sterling took advantage of dollar losses after the latest US inflation data with the Pound to Dollar (GBP/USD) exchange rate jumping to 3-month highs at 1.2860.

The dollar recovered after a relatively hawkish Federal Reserve policy decision and GBP/USD retreated to 1.2775 on Thursday with no major impact from UK data releases.

US developments and interest rate expectations will remain very important with UK markets waiting for the inflation data next Wednesday.

Pound sentiment held firm despite stagnant GDP data for April and is likely to find solid support on dips.

Rob Wood, chief UK economist at Pantheon Macroeconomics commented; "The picture of a broad-based recovery from last year's minor recession remains intact with only the rain-disrupted construction sector failing to grow three-months-on-three-months in April."

The Federal Reserve held interest rates at 5.50% following the latest policy meeting, in line with consensus forecasts.

The Fed also released the latest set of economic projections and the main focus was on the interest rates forecasts with a significant revision from the previous set.

In March, the median projection was for three interest rate cuts in 2024, but the latest set only recorded eight votes for two cuts and seven for one cut while four members expect no cut at all.

There was, therefore, a median forecast of one cut.

John Velis, Americas macro strategist at BNY noted the split vote; "Although the rate-cut view was more hawkish than in (March) we think the details moderate that hawkishness."

Rabobank still expects two rate cuts this year, but commented; “Nevertheless, the Committee’s confidence in progress on inflation clearly has been dented and this was evident in Powell’s press conference.”

Fed Chair Powell welcomed the latest inflation reading, but also commented that the committee still needed more evidence that inflation was on track to meet the 2% inflation target on a sustainable basis before cutting rates.

Powell was extremely reluctant to provide more detailed guidance with no hints on the timing of any rate cut, but continued to insist that policy is restrictive.

The chances of a September rate cut jumped to 70% after the inflation data before retreating again to 60% after the Fed meeting.

According to ING; “The Fed believes monetary policy is restrictive at 5.25-5.50% in an environment where they view the neutral interest rate as being around 2.8%. They don’t want to cause a recession if they don’t have to and if the data allows them to start making monetary policy slightly less restrictive, we think they will take that opportunity.”

It added; “We think they will start in September with a high chance they end up cutting rates by more.”

Westpac strategist Imre Speizer added; "I think markets are looking at the U.S. dollar as weakening, with fluctuations in between," said in Auckland. "That's (mostly) due to Fed rate cuts, which are still priced in for this year."

The headline US inflation rate edged lower to 3.3% from 3.4% previously while the core rate retreated to 3.4% from 3.6% and below expectations of 3.5%.

Danske Bank commented; “Importantly, May marked the 2nd consecutive month of cooling across housing and non-housing (‘supercore’) services inflation, with the latter accounting for the majority of the downside surprise in core inflation. This is a signal of further easing in underlying price pressures and supports our call for two Fed cuts in 2024.”

According to MUFG; “Overall, the report backs our forecast for the Fed to cut rates multiple times this year as slowing inflation opens the door for lower rates. A view that would be backed up as well if the labour market were to weaken more than expected.”

It added; “The Fed delivering multiple rate cuts remains a key assumption behind our forecast for a weaker US dollar in the 2H of this year.”
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